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Using Basis Risk as a Trading Strategy

In: Understanding Risk Management and Hedging in Oil Trading

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  • Chris Heilpern

Abstract

Early on in this book, I said that a trader’s first job is to create risk. If, by managing his risk, he eliminates it completely (we saw that this is impossible in practice but he can get pretty close), it means he also eliminates any further chance of making money. A perfect hedge locks the result in. Most traders are not permitted to buy ten million barrels of oil, wait a few months, and, if they were right, close the position and spend the rest of the year playing computer games while they wait for their bonus. The days of huge, speculative positions are gone, and traders like Vitol, Mercuria, and Glencore claim to hedge all their positions. So how do they make money then, other than by having better operators, a more qualified shipping department, and better access to capital? The answer is that they use basis risk in their favor.

Suggested Citation

  • Chris Heilpern, 2023. "Using Basis Risk as a Trading Strategy," Springer Books, in: Understanding Risk Management and Hedging in Oil Trading, chapter 0, pages 87-93, Springer.
    • Handle: RePEc:spr:sprchp:978-3-031-44465-4_7
    DOI: 10.1007/978-3-031-44465-4_7
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