Eric and Henry, longtime clients of J.P. Morgan Private Bank who live in Oklahoma City, own a small oil company that Eric inherited from his parents. They have recently become concerned by the declining price of oil, as their wealth is primarily generated from selling oil in the physical market. Additionally, oil has historically been a volatile commodity, so they felt they would gain some peace of mind by rethinking their current exposure. Eric and Henry reached out to their J.P. Morgan team member, Heather, to discuss their concerns and ways they could potentially protect themselves against commodity price risk. Heather looped in the Currencies, Commodities, and Interest Rates team, who worked with them to establish a plan in what is today an uncertain business. The team helped Eric and Henry lock in a price in the future with an oil swap, and also established a floor under prices by purchasing a put option. This will allow them to know what to expect for cash flow and prices over time.
All case studies are shown for illustrative purposes only and should not be relied upon as advice or interpreted as a recommendation. They are based on current market conditions that constitute our judgment and are subject to change. Results shown are not meant to be representative of actual results or experience of other individuals. Past performance is not a guarantee of the future performance of an investment.
Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Use of leveraged commodity-linked derivatives creates an opportunity for increased return but, at the same time, creates the possibility for greater loss.
