Risks from crude oil price changes generally include those from price 

decreases or increases. Crude oil producers are worried about the former risk 

as a declining crude oil price will erode their profits. In contrast, enterprises

processing crude oil are concerned about the latter risk because a growing 

crude oil price will add to their costs. 

When hedging with crude oil futures, an investor will sell or buy a crude oil 

futures contract and at the same time buy or sell crude oil in the spot market 

in order to avoid the risk of price fluctuations in the spot market. Basically,

investors may establish a short or long hedge in crude oil futures. 

Futures hedging is relatively simple but subject to some adverse factors. For 

example, when the futures price moves drastically against an investor, the 

investor will face the risk of margin calls, thereby being put under some financial

pressure. 

Unlike futures hedging, options hedging will not expose option buyers to the risk

of margin calls, regardless of changes in crude oil price. In addition to hedging 

against price risks, option buyers still have the opportunity to make a profit

when the price moves in favor of them. Nevertheless, option buyers need to pay 

premiums for buying the options. 

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