Simulation and hedging oil price with geometric Brownian Motion and single-step binomial price model

Chioma N. Nwafor, Azeez A. Oyedele

    Research output: Contribution to journalArticle

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    Abstract

    This paper[1] uses the Geometric Brownian Motion (GBM) to model the behaviour of crude oil price in a Monte Carlo simulation framework. The performance of the GBM method is compared with the naïve strategy using different forecast evaluation techniques. The results from the forecasting accuracy statistics suggest that the GBM outperforms the naïve model and can act as a proxy for modelling movement of oil prices. We also test the empirical viability of using a call option contract to hedge oil price declines. The results from the simulations reveal that the single-step binomial price model can be effective in hedging oil price volatility. The findings from this paper will be of interest to the government of Nigeria that views the price of oil as one of the key variables in the national budget.
    Original languageEnglish
    Pages (from-to)68-81
    Number of pages13
    JournalEuropean Journal of Business and Management
    Volume9
    Issue number9
    Early online date3 Apr 2017
    Publication statusPublished - Apr 2017

    Fingerprint

    Simulation
    Geometric Brownian motion
    Oil prices
    Hedging
    Modeling
    Oil
    Viability
    Option contract
    Statistics
    Crude oil price
    Government
    Oil price volatility
    Forecast evaluation
    Monte Carlo simulation
    Nigeria
    Hedge
    Call option
    Forecasting accuracy

    Keywords

    • Brownian Motion
    • oil prices
    • forecast evaluation techniques

    Cite this

    Nwafor, C. N., & Oyedele, A. A. (2017). Simulation and hedging oil price with geometric Brownian Motion and single-step binomial price model. European Journal of Business and Management, 9(9), 68-81.
    Nwafor, Chioma N. ; Oyedele, Azeez A. / Simulation and hedging oil price with geometric Brownian Motion and single-step binomial price model. In: European Journal of Business and Management. 2017 ; Vol. 9, No. 9. pp. 68-81.
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    Nwafor, CN & Oyedele, AA 2017, 'Simulation and hedging oil price with geometric Brownian Motion and single-step binomial price model', European Journal of Business and Management, vol. 9, no. 9, pp. 68-81.

    Simulation and hedging oil price with geometric Brownian Motion and single-step binomial price model. / Nwafor, Chioma N.; Oyedele, Azeez A.

    In: European Journal of Business and Management, Vol. 9, No. 9, 04.2017, p. 68-81.

    Research output: Contribution to journalArticle

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    AU - Nwafor, Chioma N.

    AU - Oyedele, Azeez A.

    N1 - OA journal - statement at footer of journal webpage: 'This journal follows ISO 9001 management standard and licensed under a Creative Commons Attribution 3.0 License.' See link to article above. No entry in Sherpa for this journal. Publisher version uploaded by author, made open as CC-BY content however note that this statement doesn't appear on the PDF. Acceptance date + online pub. date confirmed by author (email in SAN)

    PY - 2017/4

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    N2 - This paper[1] uses the Geometric Brownian Motion (GBM) to model the behaviour of crude oil price in a Monte Carlo simulation framework. The performance of the GBM method is compared with the naïve strategy using different forecast evaluation techniques. The results from the forecasting accuracy statistics suggest that the GBM outperforms the naïve model and can act as a proxy for modelling movement of oil prices. We also test the empirical viability of using a call option contract to hedge oil price declines. The results from the simulations reveal that the single-step binomial price model can be effective in hedging oil price volatility. The findings from this paper will be of interest to the government of Nigeria that views the price of oil as one of the key variables in the national budget.

    AB - This paper[1] uses the Geometric Brownian Motion (GBM) to model the behaviour of crude oil price in a Monte Carlo simulation framework. The performance of the GBM method is compared with the naïve strategy using different forecast evaluation techniques. The results from the forecasting accuracy statistics suggest that the GBM outperforms the naïve model and can act as a proxy for modelling movement of oil prices. We also test the empirical viability of using a call option contract to hedge oil price declines. The results from the simulations reveal that the single-step binomial price model can be effective in hedging oil price volatility. The findings from this paper will be of interest to the government of Nigeria that views the price of oil as one of the key variables in the national budget.

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    Nwafor CN, Oyedele AA. Simulation and hedging oil price with geometric Brownian Motion and single-step binomial price model. European Journal of Business and Management. 2017 Apr;9(9):68-81.