Comparison of price reaction chosen indirect crude oil investment to trend in crude oil prices

• Author: Michal Kovárík
• Position: Department of business economics Faculty of Management and Economics (FaME) in Zlín Mostní 5139, 760 01 Zlín, Czech Republic
• Pages: 255-264

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Introduction

My work deals with financial markets sphere. Permanent development of this part of economy in last decades produces new financial products. Warrants¹ are among the most modern ones. Comparing to shares warrant is a cheaper investment instrument and it precisely traces and multiplies the price effect of underlying asset development (crude oil in this case) which it projects in its value. Warrants therefore fulfill my requirements of price, maturity and other investment conditions. The goal of my work is to compare different warrant strategies at the crude oil market and to point out its advantages comparing to investment to shares of chosen US companies dealing with crude oil regarding three time periods - short term, medium term and long term. I will show this in the first chapter of my work. In my research markedly lower crude oil price development reflectance showed concerning tracked shares and the so called psychological barrier occurred. This means that the shares price, in contrast to warrants, did not react at all to crude oil price development in certain periods. I will show this in the second chapter of my work.

Used research methodology

Financial derivatives are financial instruments that are linked to a specific financial instrument or indicator or commodity, and which provide for market financial risk in a form that can be traded or otherwise offset in the market. Financial derivatives are used for a number of purposes including risk management, hedging, and speculation. Unlike with debt instruments, no principal

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amount is advanced to be repaid, and no investment income accrues. The value of the financial derivative derives from the price of the underlying items. [8]

When day trading, a trader makes the decision about what to trade, when to trade, and how to trade, using either fundamental or technical analysis. Both forms of analysis involve looking at the available information and making a decision about the future price of the market being traded, but the information that is used is completely different. Is it possible to use both fundamental and technical analysis together, but it is more common for a trader to choose one or the other. Fundamental traders use information about the global and national economies, and the financial state of the companies involved, as well as non financial information such as current political and weather information. Fundamental traders believe that the markets will react to events in certain ways and that they can predict future market prices based on these events. For example, if a company receives regulatory approval for a new product, a fundamental trader might expect the company's stock price to rise. Conversely, if a company has a financial scandal, a fundamental trader might expect its stock price to fall. Fundamental traders need access to all of the available information as soon as it is available, and are therefore often institutional traders with large support teams, rather than individuals. Fundamental analysis has probably been in use since there were markets to trade, and has traditionally been done manually, but as computing power increases it has become possible for some fundamental information to be processed automatically. Technical traders use trading information (such as previous prices and trading volume) along with mathematical indicators to make their trading decisions. This information is usually displayed on a graphical chart and is updated in real time throughout the trading day. Technical traders believe that all of the information about a market is already included in the price movement, so they do not need any other fundamental information (such as earnings reports). There are many different types of charts and many different mathematical indicators. Some indicators are better suited to short term trading, and others are better suited for longer term trend following trading. Individual traders are usually technical traders. Technical analysis appears to have been used at least 200 years ago in Japan. Modern technical analysis is usually performed by the trader interpreting their charts, but can just as easily be automated because it is mathematical. Some traders prefer automatic analysis because it...