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Commodity Risk – Petroleum Companies

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  • Deepak Ukidave

Abstract

Petroleum refining and marketing companies refine the crude oil procured from domestic and international sources to sell the finished products in Indian Market. The price of crude oil is very volatile and so is the case with the price of petroleum products. Since, prices of both crude oil and petroleum products are used to calculate refining margin, we can say that petroleum refining and marketing companies are exposed to risks from volatility in refining margin. Refining margin has a direct impact on the profitability of the company. Thus, profit margin fluctuates with the fluctuations in the refining margin. This impact can be minimized using derivative instruments like futures, options and swaps. In the first half of this report, we have quantified the impact of volatile commodity prices on refining margin and in the second part, we have discussed various hedging instruments and strategy to reduce this impact.

Suggested Citation

  • Deepak Ukidave, 2004. "Commodity Risk – Petroleum Companies," The IUP Journal of Financial Economics, IUP Publications, vol. 0(3), pages 41-71, September.
  • Handle: RePEc:icf:icfjfe:v:02:y:2004:i:3:p:41-71
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