Transactions in the Oil Markets

Vincent Kaminski

As was explained in Chapter 4, forward and futures can be used for hedging, speculation or arbitrage. This chapter will review some of the most popular structured transactions used in the oil and refined product markets, combining different derivative instruments covered earlier in the book (Chapters 4 and 5). Many of these structures have been designed to offer the hedging companies more flexibility in structuring their risk-mitigation strategies. This can be accomplished in a number of ways:

• • combining in one structure instruments of different types (for example, swaps and options or options of different types) offering the buyer ability to execute the hedge in one step, instead of building the hedging portfolio step by step from atomic components);

• • combining in one structure the same instruments (for example, forwards) related to different underlying physical commodities; and

• • combining different instruments and different underlying commodities.

The techniques used to structure hedging instruments that will be discussed apply to different markets. The principles are the same, although specific conventions will vary