The Role of Futures and Other Energy-Linked Financial Instruments

Abstract

Significant volatility has become a way of life in the oil markets. Traders find this level of market volatility attractive. Managers find the uncertainty inherent in this complex and volatile environment both unsettling and expensive. It creates significant economic risk, managerial risk, and capabilities risk. The dramatic explosion in the size and sophistication of oil-linked financial instruments represents a response to volatility. These markets have forced companies to adopt new strategies, business processes, information systems, and organizational structures to remain competitive. We expect the future will see many oil-linked financial markets and products which will provide new risk management tools. These trends will reward firms that can successfully manage risks associated with credit, liquidity, complexity, and financial evaluation.