Abstrait

Analysis on the effectiveness of using energy futures to avoid oil price fluctuation risks by Chinese enterprises

Chen Xi, Liu Jun, Xie Wei

As the world's second largest oil consumer, the drastic fluctuations of international oil price in recent years have posed huge uncertainties to the survival and development of China’s related enterprises. On the other hand, with the reduced of liquidity in Shanghai fuel oil futures market, its risk aversion function decreased too. In order to find the reasonable ways and strategies to circumventing the risks resulting from international oil prices for China’s enterprises, this paper analyzes the feasibility of using Shanghai fuel oil futures and NYMEX light sweet crude oil futures contracts to mitigate the risks brought by WTI Crude Oil Spot Price. According to the results on the latest data, the consistency between Shanghai fuel oil futures and WTI Crude Oil Spot Price is not significant, showing a lack of the premise of hedging. The NYMEX light sweet crude oil futures, under the current market conditions, can be a better choice for China’s enterprises. At last, this paper estimates the best risk hedge ratio by virtue of the ECM-GARCH Model. The performance analysis results show that with this hedging strategy, nearly 92% spot price fluctuation risks can be avoided.