When oil companies in Korea import crude oil in a spot market, the companies face three market risks: price risk, foreign exchange risk, and interest rate risk. Meanwhile, energy companies, such as Mobil and BP Amoco, manage the market risk of derivatives using Value at Risk.
This paper put an emphasis on measuring the risks because we could not find the empirical papers which measured the market risks of imported physical commodities. Additionally, I try to find out the inter-relationship among these risks, and the differences between physical commodities and financial instruments in measuring the risks and using VAR.
For simplification of measuring the risks, I make assumptions as follows: First, oil companies purchase spot crude oil every three days or every ten days. Secondly, the price of spot crude oil is fixed at the time of entering into a contract. Finally, the amount of the oil is paid with issuing zero coupon bond maturing in three months, and the discounted rate of the bond is based on Certificate of Deposit( ninty-one day ) interest rate.
There is a time difference between the price risk and the financial risks. But the price risk and the financial risks can be measured separately because of no Granger- causality and correlation between the two risks. As a result of measuring the volitility using GARCH(1,1)model, the volitilities are homoscedastic except the volitility of the three-day return of spot crude oil price.
Historical VARs change a little bit in the two purchasing cycles, but Delta-normal VARs show dramatic change in the cycles. That is because the kurtosis of the three- day purchasing cycle is much higher than that of the ten-day purchasing cycle.
The position of the portfolios to measure the risks is negative but that of financial instruments is positive. Also, the adjustment of the position is highly limited and VAR is useful to determine whether to hedge or not.