Jet Fuel Hedging Essay

5736 Words Jun 4th, 2012 23 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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It is the believe of some airlines that increases in fuel prices can be easily passed on to customers without having a negative impact on profit while there are those who are confident fuel prices will decline and they will reap those rewards.

In this project, we will define hedging, its process, the considerations that have to be taken into account in order for hedging to be less of a risk, the “Pros and Cons” arguments that are currently being made by some major airline carriers and their executives, and the risk factors that can be found when hedging fuel and its derivatives.

1. “Hedging” Defined “Hedging” is defined as the making of an investment looking forward to reduce the risk of unfavorable price movements in an asset. In other words, a hedge is used to reduce any substantial losses suffered by an individual or an organization. “It is used as a risk management strategy to limit or offset the probability of a loss caused by the fluctuation in the prices of commodities, currencies or securities.” [1] In effect, it is considered as a transfer of risk without buying insurance policies. A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, many types of over-the-counter and derivative products, and futures contracts.

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