The use of futures prices and options by Oman to manage wheat import price variability

Oman - 11 August 2017

The objective of this paper is to evaluate whether using financial instruments such as commodity hedging using futures and options would help Oman to improve risk management in wheat imports. Around 61% of wheat imports by Oman during the period covered by this study from 2009 to 2015 were from Australia. The Australian futures were found to be highly correlated with Kansas City Hard Red Wheat (HRW) futures. Employing Kansas City Hard Red Wheat (HRW) futures and options, five simulations were performed involving buying all annual wheat needs in one lot and buying all annual wheat needs in equal monthly installments (spreading risk). Results show that the use of market-based financial risk management tools such as futures and options by Oman would reduce the impact of price volatility. Furthermore, based on the simulations, a combination of futures and options strategies, as well as, buying all annual wheat needs in equal monthly installments (spreading risk) would provide a better protection against price volatility for Oman.

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