IDEAS home Printed from https://ideas.repec.org/a/eee/transe/v133y2020ics1366554519311883.html
   My bibliography  Save this article

Handling financial risks in crude oil imports: Taking into account crude oil prices as well as country and transportation risks

Author

Listed:
  • Wang, Shuang
  • Wallace, Stein W.
  • Lu, Jing
  • Gu, Yewen

Abstract

Financial risks related to crude oil imports are certainly affected by crude oil price uncertainty. Our question is: How important is it to take also physical risks, such as the crude oil exporters’ political risks and transportation risks into account when controlling financial risks in line with the importer’s risk attitude when planning crude oil imports and transportation at a tactical level? In this paper, two-stage stochastic programming models are proposed to illustrate the problem, and a numerical test is conducted to better understand the effects of physical risks. The mechanism for controlling risk will be forward physical contracts. The results show that the real financial risk is much higher than the importer might believe if physical risks are not considered. Unless the importer is risk neutral, more forward crude oil will be imported when physical risks are considered, and the distribution of forward crude oil will depend strongly on correlations among risks.

Suggested Citation

  • Wang, Shuang & Wallace, Stein W. & Lu, Jing & Gu, Yewen, 2020. "Handling financial risks in crude oil imports: Taking into account crude oil prices as well as country and transportation risks," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 133(C).
    • Handle: RePEc:eee:transe:v:133:y:2020:i:c:s1366554519311883
    DOI: 10.1016/j.tre.2019.101824
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1366554519311883
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.tre.2019.101824?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Alizadeh, Amir H. & Nomikos, Nikos K., 2004. "Cost of carry, causality and arbitrage between oil futures and tanker freight markets," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 40(4), pages 297-316, July.
    2. Hennig, F. & Nygreen, B. & Christiansen, M. & Fagerholt, K. & Furman, K.C. & Song, J. & Kocis, G.R. & Warrick, P.H., 2012. "Maritime crude oil transportation – A split pickup and split delivery problem," European Journal of Operational Research, Elsevier, vol. 218(3), pages 764-774.
    3. Li, Bo & An, Si-min & Song, Dong-ping, 2018. "Selection of financing strategies with a risk-averse supplier in a capital-constrained supply chain," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 118(C), pages 163-183.
    4. John Cotter & Jim Hanly, 2006. "Reevaluating hedging performance," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 26(7), pages 677-702, July.
    5. Chang, Chia-Lin & McAleer, Michael & Tansuchat, Roengchai, 2011. "Crude oil hedging strategies using dynamic multivariate GARCH," Energy Economics, Elsevier, vol. 33(5), pages 912-923, September.
    6. Hennig, F. & Nygreen, B. & Furman, K.C. & Song, J., 2015. "Alternative approaches to the crude oil tanker routing and scheduling problem with split pickup and split delivery," European Journal of Operational Research, Elsevier, vol. 243(1), pages 41-51.
    7. Liu, Zugang & Wang, Jia, 2019. "Supply chain network equilibrium with strategic supplier investment: A real options perspective," International Journal of Production Economics, Elsevier, vol. 208(C), pages 184-198.
    8. Yun, Won-Cheol & Jae Kim, Hyun, 2010. "Hedging strategy for crude oil trading and the factors influencing hedging effectiveness," Energy Policy, Elsevier, vol. 38(5), pages 2404-2408, May.
    9. de Assis, Leonardo Salsano & Camponogara, Eduardo, 2016. "A MILP model for planning the trips of dynamic positioned tankers with variable travel time," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 93(C), pages 372-388.
    10. Ahmed Ghorbel & Abdelwahed Trabelsi, 2012. "Optimal dynamic hedging strategy with futures oil markets via FIEGARCH-EVT copula models," International Journal of Managerial and Financial Accounting, Inderscience Enterprises Ltd, vol. 4(1), pages 1-28.
    11. Fernández, Elena & Hinojosa, Yolanda & Puerto, Justo & Saldanha-da-Gama, Francisco, 2019. "New algorithmic framework for conditional value at risk: Application to stochastic fixed-charge transportation," European Journal of Operational Research, Elsevier, vol. 277(1), pages 215-226.
    12. Kazemi, Yasaman & Szmerekovsky, Joseph, 2015. "Modeling downstream petroleum supply chain: The importance of multi-mode transportation to strategic planning," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 83(C), pages 111-125.
    13. Pelin G. Canbolat & Uriel G. Rothblum, 2019. "Constant risk aversion in stochastic contests with exponential completion times," Naval Research Logistics (NRL), John Wiley & Sons, vol. 66(1), pages 4-14, February.
    14. Ederington, Louis H, 1979. "The Hedging Performance of the New Futures Markets," Journal of Finance, American Finance Association, vol. 34(1), pages 157-170, March.
    15. Chen, Ruoran & Deng, Tianhu & Huang, Simin & Qin, Ruwen, 2015. "Optimal crude oil procurement under fluctuating price in an oil refinery," European Journal of Operational Research, Elsevier, vol. 245(2), pages 438-445.
    16. Balliauw, Matteo & Kort, Peter M. & Zhang, Anming, 2019. "Capacity investment decisions of two competing ports under uncertainty: A strategic real options approach," Transportation Research Part B: Methodological, Elsevier, vol. 122(C), pages 249-264.
    17. Mr. Noureddine Krichene, 2008. "Crude Oil Prices: Trends and Forecast," IMF Working Papers 2008/133, International Monetary Fund.
    18. Gavriilidis, Konstantinos & Kambouroudis, Dimos S. & Tsakou, Katerina & Tsouknidis, Dimitris A., 2018. "Volatility forecasting across tanker freight rates: The role of oil price shocks," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 118(C), pages 376-391.
    19. Ahmad R. Jalali‐Naini & Maryam Kazemi Manesh, 2006. "Price volatility, hedging and variable risk premium in the crude oil market," OPEC Energy Review, Organization of the Petroleum Exporting Countries, vol. 30(2), pages 55-70, June.
    20. Yuki Toyoshima & Tadahiro Nakajima & Shigeyuki Hamori, 2013. "Crude oil hedging strategy: new evidence from the data of the financial crisis," Applied Financial Economics, Taylor & Francis Journals, vol. 23(12), pages 1033-1041, June.
    21. Wang, Fan & Yang, Xiao & Zhuo, Xiaopo & Xiong, Minghua, 2019. "Joint logistics and financial services by a 3PL firm: Effects of risk preference and demand volatility," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 130(C), pages 312-328.
    22. Leland L. Johnson, 1960. "The Theory of Hedging and Speculation in Commodity Futures," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 27(3), pages 139-151.
    23. Aizemberg, Luiz & Kramer, Hugo Harry & Pessoa, Artur Alves & Uchoa, Eduardo, 2014. "Formulations for a problem of petroleum transportation," European Journal of Operational Research, Elsevier, vol. 237(1), pages 82-90.
    24. Robert J. Myers & Stanley R. Thompson, 1989. "Generalized Optimal Hedge Ratio Estimation," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 71(4), pages 858-868.
    25. Sun, Mei & Gao, Cuixia & Shen, Bo, 2014. "Quantifying China's oil import risks and the impact on the national economy," Energy Policy, Elsevier, vol. 67(C), pages 605-611.
    26. Atiq Siddiqui & Manish Verma, 2013. "An Expected Consequence Approach to Route Choice in the Maritime Transportation of Crude Oil," Risk Analysis, John Wiley & Sons, vol. 33(11), pages 2041-2055, November.
    27. Jin, Di & Kite-Powell, Hauke L., 1999. "On the optimal environmental liability limit for marine oil transport," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 35(2), pages 77-100, June.
    28. Chen, Sheng-Syan & Lee, Cheng-few & Shrestha, Keshab, 2003. "Futures hedge ratios: a review," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(3), pages 433-465.
    29. Vivoda, Vlado, 2009. "Diversification of oil import sources and energy security: A key strategy or an elusive objective?," Energy Policy, Elsevier, vol. 37(11), pages 4615-4623, November.
    30. Param Silvapulle & Imad A. Moosa, 1999. "The relationship between spot and futures prices: Evidence from the crude oil market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 19(2), pages 175-193, April.
    31. Michael S. Haigh & Matthew T. Holt, 2002. "Crack spread hedging: accounting for time-varying volatility spillovers in the energy futures markets," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 17(3), pages 269-289.
    32. Qu, Xiaobo & Meng, Qiang, 2012. "The economic importance of the Straits of Malacca and Singapore: An extreme-scenario analysis," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 48(1), pages 258-265.
    33. Sukcharoen, Kunlapath & Leatham, David J., 2017. "Hedging downside risk of oil refineries: A vine copula approach," Energy Economics, Elsevier, vol. 66(C), pages 493-507.
    34. Michal Kaut, 2014. "A copula-based heuristic for scenario generation," Computational Management Science, Springer, vol. 11(4), pages 503-516, October.
    35. Jianping Li & Xiaolei Sun & Wan He & Ling Tang & Weixuan Xu, 2009. "Modeling Dynamic Correlations And Spillover Effects Of Country Risk: Evidence From Russia And Kazakhstan," International Journal of Information Technology & Decision Making (IJITDM), World Scientific Publishing Co. Pte. Ltd., vol. 8(04), pages 803-818.
    36. Liu, Zugang & Wang, Jia, 2019. "Supply chain network equilibrium with strategic financial hedging using futures," European Journal of Operational Research, Elsevier, vol. 272(3), pages 962-978.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bai, Xiwen, 2021. "Tanker freight rates and economic policy uncertainty: A wavelet-based copula approach," Energy, Elsevier, vol. 235(C).
    2. Wang, Shuang & Jia, Haiying & Lu, Jing & Yang, Dong, 2023. "Crude oil transportation route choices: A connectivity reliability-based approach," Reliability Engineering and System Safety, Elsevier, vol. 235(C).
    3. Kumar, Sourabh & Kumar Barua, Mukesh, 2022. "Modeling and investigating the interaction among risk factors of the sustainable petroleum supply chain," Resources Policy, Elsevier, vol. 79(C).
    4. Zhang, Dongqing & Wallace, Stein W. & Guo, Zhaoxia & Dong, Yucheng & Kaut, Michal, 2021. "On scenario construction for stochastic shortest path problems in real road networks," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 152(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. George E. Halkos & Apostolos S. Tsirivis, 2019. "Energy Commodities: A Review of Optimal Hedging Strategies," Energies, MDPI, vol. 12(20), pages 1-19, October.
    2. Chang, Chia-Lin & McAleer, Michael & Tansuchat, Roengchai, 2011. "Crude oil hedging strategies using dynamic multivariate GARCH," Energy Economics, Elsevier, vol. 33(5), pages 912-923, September.
    3. Wang, Yudong & Geng, Qianjie & Meng, Fanyi, 2019. "Futures hedging in crude oil markets: A comparison between minimum-variance and minimum-risk frameworks," Energy, Elsevier, vol. 181(C), pages 815-826.
    4. Wenming Shi & Kevin X. Li & Zhongzhi Yang & Ganggang Wang, 2017. "Time-varying copula models in the shipping derivatives market," Empirical Economics, Springer, vol. 53(3), pages 1039-1058, November.
    5. Chun, Dohyun & Cho, Hoon & Kim, Jihun, 2019. "Crude oil price shocks and hedging performance: A comparison of volatility models," Energy Economics, Elsevier, vol. 81(C), pages 1132-1147.
    6. Qianjie Geng & Yudong Wang, 2021. "Futures Hedging in CSI 300 Markets: A Comparison Between Minimum-Variance and Maximum-Utility Frameworks," Computational Economics, Springer;Society for Computational Economics, vol. 57(2), pages 719-742, February.
    7. Chen, Xiangyu & Tongurai, Jittima, 2021. "Cross-commodity hedging for illiquid futures: Evidence from China's base metal futures market," Global Finance Journal, Elsevier, vol. 49(C).
    8. Cao, Min & Conlon, Thomas, 2023. "Composite jet fuel cross-hedging," Journal of Commodity Markets, Elsevier, vol. 30(C).
    9. Shrestha, Keshab & Subramaniam, Ravichandran & Peranginangin, Yessy & Philip, Sheena Sara Suresh, 2018. "Quantile hedge ratio for energy markets," Energy Economics, Elsevier, vol. 71(C), pages 253-272.
    10. Billio, Monica & Casarin, Roberto & Osuntuyi, Anthony, 2018. "Markov switching GARCH models for Bayesian hedging on energy futures markets," Energy Economics, Elsevier, vol. 70(C), pages 545-562.
    11. Olson, Eric & Vivian, Andrew & Wohar, Mark E., 2019. "What is a better cross-hedge for energy: Equities or other commodities?," Global Finance Journal, Elsevier, vol. 42(C).
    12. Alexander, Carol & Prokopczuk, Marcel & Sumawong, Anannit, 2013. "The (de)merits of minimum-variance hedging: Application to the crack spread," Energy Economics, Elsevier, vol. 36(C), pages 698-707.
    13. Dinica, Mihai Cristian & Armeanu, Daniel, 2014. "The Optimal Hedging Ratio for Non-Ferrous Metals," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 105-122, March.
    14. You‐How Go & Jia‐Jun Teo & Kam Fong Chan, 2023. "The effectiveness of crude oil futures hedging during infectious disease outbreaks in the 21st century," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(11), pages 1559-1575, November.
    15. Arunanondchai, Panit & Sukcharoen, Kunlapath & Leatham, David J., 2020. "Dealing with tail risk in energy commodity markets: Futures contracts versus exchange-traded funds," Journal of Commodity Markets, Elsevier, vol. 20(C).
    16. Асатуров К.Г. & Теплова Т.В., 2014. "Построение Коэффициентов Хеджирования Для Высоколиквидных Акций Российского Рынка На Основе Моделей Класса Garch," Журнал Экономика и математические методы (ЭММ), Центральный Экономико-Математический Институт (ЦЭМИ), vol. 50(1), pages 37-54, январь.
    17. Ismael Pérez-Franco & Esteban Otto Thomasz & Gonzalo Rondinone & Agustín García-García, 2022. "Feed price risk management for sheep production in Spain: a composite future cross-hedging strategy," Risk Management, Palgrave Macmillan, vol. 24(2), pages 137-163, June.
    18. Su, Kuangxi & Yao, Yinhong & Zheng, Chengli & Xie, Wenzhao, 2023. "A novel hybrid strategy for crude oil future hedging based on the combination of three minimum-CVaR models," International Review of Economics & Finance, Elsevier, vol. 83(C), pages 35-50.
    19. Chang, Chiao-Yi & Lai, Jing-Yi & Chuang, I-Yuan, 2010. "Futures hedging effectiveness under the segmentation of bear/bull energy markets," Energy Economics, Elsevier, vol. 32(2), pages 442-449, March.
    20. Kumar, Sourabh & Barua, Mukesh Kumar, 2022. "A modeling framework and analysis of challenges faced by the Indian petroleum supply chain," Energy, Elsevier, vol. 239(PE).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:transe:v:133:y:2020:i:c:s1366554519311883. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/wps/find/journaldescription.cws_home/600244/description#description .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.