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Promoting financial stability of oil producers: Operational vs. financial hedging

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  • Fang, Yiwei
  • Kang, Sang Baum
  • Lu, You

Abstract

This paper investigates the effects of operational hedging on commodity price risks. It explores a novel type of operational hedging, i.e., the natural operational hedge position between upstream crude oil production and downstream activities in the supply chain. Using hand-collected data from 293 unique oil-producing firms, we find that operational hedging is sufficiently effective in reducing firms’ exposure to oil-price risk. We also find an inverse relationship between operational and financial hedging, suggesting that they can substitute for each other.

Suggested Citation

  • Fang, Yiwei & Kang, Sang Baum & Lu, You, 2023. "Promoting financial stability of oil producers: Operational vs. financial hedging," Journal of Financial Stability, Elsevier, vol. 67(C).
    • Handle: RePEc:eee:finsta:v:67:y:2023:i:c:s1572308923000529
    DOI: 10.1016/j.jfs.2023.101152
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    More about this item

    Keywords

    Operational hedging; Financial hedging; Oil producer; Risk management;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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