Appraising the convenience of a call-based dynamical hedging strategy for an oil-company

Abstract

This paper presents a quantitative approach to hedging financial risks associated with changes in international oil prices for companies that import crude oil. The authors utilize the Geometric Brownian Motion model to capture the dynamic behavior of prices over time. To determine the optimal use of Call-options, the authors formulate a linear problem that minimizes the Conditional Value-at-Risk of the distribution of losses relative to the expected budget. The solution to this problem is obtained through a combination of Linear Programming optimization and Monte Carlo simulation. It enables the identification of the best Call-option offer that minimizes the risk of financial losses while staying within budget constraints. The validity of the proposed methodology is demonstrated through detailed examples that showcase its capabilities.