Jet Fuel Hedging

5737 Words23 Pages
“To Hedge or Not to Hedge: The Dilemma Airlines Face when it comes to Jet Fuel”

Instructor: Dr. William Hardin III

Professional Master’s in Business Adminstration Program- Panama

May 5th, 2012

Project Outline

1. “Hedging” Defined

2. The Hedging Process

1. The Fuel Hedging Decision-making 2. Steps in the Hedging Process 3. Different types of Hedging Strategies 4. The Accounting Aspects of Hedging 5. Formula used in the Spot Pricing of Jet Fuel

3. Pros and Cons Arguments of Hedging Jet Fuel

4. Risk Factors that may affect the Hedging of Jet Fuel.

5. Conclusion

6. Data Analysis,
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A fuel hedge contract allows a large fuel consuming company to establish a fixed or capped cost, via a commodity swap or option. These companies enter into hedging contracts to mitigate their exposure to future fuel prices that may be higher than current prices and/or to establish a known fuel cost for budgeting purposes. If a large fuel consuming company buys a fuel swap and the price of fuel declines, the company will effectively be forced to pay an above-market rate for fuel. If a large fuel consuming company buys a fuel call option and the price of fuel increases, the company will receive a return on the option that offsets their actual cost of fuel. If a large fuel consuming company buys a fuel call option, which requires an upfront premium cost, much like insurance, and the price of fuel decreases, the company will not receive a return on the option but they will benefit from buying fuel at the then lower price.

2. The Hedging Process 2.1. The Fuel Hedging Decision

Fuel hedging is a contractual tool that some fuel consuming companies, such as airlines, use in order to try to stabilize the price they pay for the jet fuel they will need in the future.
If the airlines can predicts that the cost of fuel is going to increase in the future, the airline can sign a fuel hedging contract to purchase (3 months, 6 months, and up to 1 year) of fuel hedges for that period for a specific price and ahead of time. If the price predicted

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