The Brent & WTI Markets. The Suitable Hedging Practice and Their Recent Decoupling on the Two Atlantic Shores.

4 INTRODUCTION How to specify a commodity? An economist would say it is a consumption asset whose insufficiency, whether in the sort of depleted reserves or consumed stocks, takes a key influence on the world and country- specific economic growth. A banker would discern that it is not a financial asset, providing streams of cash-flows and evaluated by net present value debates. An environmentalist would put forward that it is a natural good whose unique candor should be unspoiled. An academic would claim that, given the contemporary volatility of all currencies, a commodity is a standard numéraire with respect to which portfolio values should be measured. Indeed, since the massive rally of the dollar currency with respect to the other ones that a valid suggestion could be to take as a universal numéraire, in the specific case of the crude oil markets, a barrel of crude oil relative to which all currencies would be expressed (the gold-standard mechanism that used to play decades ago). 1 Commodity markets have lately undergone an intense growth with respect to volumes, new traded contracts, number of operating exchanges as well as market participants. The most significant development has been in the trading of commodity derivatives, such as futures and options. Trading volumes in commodity futures have risen steadily over the past two decades on exchanges such as the InterContinental Exchange (ICE) and the New York Mercantile Exchange (NYMEX). Moreover, exchanges constantly announce futures and options on new commodities, such as electricity futures that are now trading in many countries after the liberalization of electricity markets. It is essential to note that futures commodity markets are the ones where most of the activity is taking place. In the case of oil for instance, volumes in these markets are nine times larger than those occurring in the spot market, and this 1 Geman H. (2005). Commodities and Commodity Derivatives: Modeling and Pricing for Agricultural, Metals and Energy. London, Wiley Finance.