Volatility in Crude Oil Markets: Trading and Risk Management

The present quantitative research, which has been published on the J.P. Morgan Center for Commodities’ Global Commodities Applied Research Digest, analyzes the leverage effect of volatility in two of the most important crude oil grade markets in the world: Brent and WTI.

Volatility is a key factor when it comes to pricing options and building an effective risk management strategy and this is precisely why this research, which you can read here in full, focuses on the behaviour of volatility in crude oil markets.

The present quantitative research has been based on the implied volatility extracted from Average Price Options (APOs) which are over-the-counter types of options contracts extensively used by commodity market players to hedge their physical market exposure.

What makes APOs so special and wanted by physical market participants is the fact that their underlying contracts are not futures but swaps, which are another very common, over-the-counter financial derivatives utilized by refiners and energy producers to manage the risk in their physical portfolios.