Title: Portfolio risk reduction in oil pricing: the case for SDRs

Authors: Musa Essayyad, Ibrahim Algahtani

Addresses: Department of Finance and Economics, College of Industrial Management, King Fahd University of Petroleum and Minerals, Dhahran 31261, Saudi Arabia. ' Department of Finance and Economics, College of Industrial Management, King Fahd University of Petroleum and Minerals, Dhahran 31261, Saudi Arabia

Abstract: Recognising the superior benefits of risk reduction associated with using portfolio of currencies relative to a single currency (US dollar), this paper shows that, ceteris paribus, a minimum-variance portfolio of currencies in the developed world has weights that strikingly mimic those currencies making up the SDRs. This means that discounting the benefits of using the US dollar derived mainly from prevailing geopolitics and oil trade infrastructure, SDRs basket would be the viable alternative to use in oil pricing in terms of its superior risk reduction benefits.

Keywords: portfolio choice; portfolio risks; risk reduction; oil pricing; international financial markets; policy; regulation: international finance; foreign exchange; international monetary arrangements; international monetary institutions; basket of currencies; special drawing rights; SDRs.

DOI: 10.1504/IJGEI.2007.014863

International Journal of Global Energy Issues, 2007 Vol.27 No.4, pp.395 - 403

Published online: 13 Aug 2007 *

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