Appendix
Main . if
body anything
Read the case study till you get a fair
understanding available
Problem Evaluation
Decision
Go through the case carefully and make necessary notes
Develop the Hypothesis
Solve the problem using given Information
Recommend the solution
This recommendation should be the best one
among the available alternatives
Thota Nagaraju BITS-Pilani Hyderabad Campus Derivatives and Risk Management Summer Term 2016-17
State the
conclusion
( Supported
by Executive
Summary)
Make the
case study
(What is it
about)
Action Plan
(Addressing the
problem through
a proper
structure)
Thota Nagaraju BITS-Pilani Hyderabad Campus Derivatives and Risk Management Summer Term 2016-17
Points to Remember
There is no perfect answer
Do not mug up things
Listen carefully
If there is any ambiguity ask clarification questions
Do not rush in answering the questions
While answering the questions, use the facts if any available (e.g., numbers)
If you made mistake while answering, just except it and keep move on.
Questions can direct or indirect, so focus on question type also so that you do not
waste the time.
Try to answer in your own way, avoid the traditional way of answering if possible. i.e.
develop your own approach to solve the questions.
Thota Nagaraju BITS-Pilani Hyderabad Campus Derivatives and Risk Management Summer Term 2016-17
2012 Fuel Hedging at JetBlue Airways
What is all about this case study
Examining the jet fuel hedging strategy of JetBlue Airways for coming years.
Isn’t it a simple straightforward hedging?
Answer: No.
Because, generally Airlines cross hedge their jet fuel price risk using derivatives contracts on other
oil products such as WTI and Brent crude oil.
Consequently, an airline is exposed to basis risk.
Is that really a problem to discuss, because we have studied in the “hedging strategies using
futures contracts” to minimize the basis risk.
Actually it would not have been a problem if WTI would have remained as the hedging instrument,
but due to its location shift it became very expensive compare to alternatives so airlines moved on
to Brent crude oil.
Thota Nagaraju BITS-Pilani Hyderabad Campus Derivatives and Risk Management Summer Term 2016-17
2012 Fuel Hedging at JetBlue Airways
Given the jet fuel hedging requirement and location change in the hedging (WTI),
the following questions are need to be addressed as an analyst.
1. Should JetBlue hedge its fuel costs?
2. How do airlines hedge their jet fuel price risk?
3. Which commodity moves closely to the price of jet fuel?
4. Based on the recent 2007 to 2011 historical data is there a reason to switch from WTI to Brent
Hedging?
5. Should Jet Blue switch to Brent hedging?
6. What risks are being hedged and what risks are left unhedged?
Thota Nagaraju BITS-Pilani Hyderabad Campus Derivatives and Risk Management Summer Term 2016-17
2012 Fuel Hedging at JetBlue Airways
Should JetBlue hedge its fuel costs?
Hedge Not Hedge
JetBlue's core competency is not in the forecasting of fuel
prices. It needs to be able to forecast its costs with Hedging Expensive
accuracy
Limited pass-through to ticket prices; if competitors hedge, JetBlue can hedge price risk, but not
they need to hedge. quantity/volume risk.
Thota Nagaraju BITS-Pilani Hyderabad Campus Derivatives and Risk Management Summer Term 2016-17
2012 Fuel Hedging at JetBlue Airways
How do airlines hedge their jet fuel price risk?
Cross Hedging
Thota Nagaraju BITS-Pilani Hyderabad Campus Derivatives and Risk Management Summer Term 2016-17
2012 Fuel Hedging at JetBlue Airways
Which commodity moves closely to the price of jet fuel?
Thota Nagaraju BITS-Pilani Hyderabad Campus Derivatives and Risk Management Summer Term 2016-17
2012 Fuel Hedging at JetBlue Airways
Based on the recent 2007 to 2011 historical data is
there a reason to switch from WTI to Brent Hedging?
WTI-Brent Spread is increasing overtime, so we have to find as which one will be the better hedging
instrument.
For this we have to run the regressions on WTI and Brent. We will get to know that the Brent hedging
efficiency will be more compare to WTI
Thota Nagaraju BITS-Pilani Hyderabad Campus Derivatives and Risk Management Summer Term 2016-17
2012 Fuel Hedging at JetBlue Airways
Should Jet Blue switch to Brent hedging?
Thota Nagaraju BITS-Pilani Hyderabad Campus Derivatives and Risk Management Summer Term 2016-17
2012 Fuel Hedging at JetBlue Airways
Should Jet Blue switch to Brent hedging?
Thota Nagaraju BITS-Pilani Hyderabad Campus Derivatives and Risk Management Summer Term 2016-17
2012 Fuel Hedging at JetBlue Airways
What risks are being hedged and what risks are left unhedged?
JetBlue’s hedging strategy is based on estimated fuel consumption for
2012. The jet fuel derivatives strategies discussed in the case can only
reduce price risk but not quantity risk due to demand fluctuations.
Frequently, airlines will avoid hedging 100% of their estimated fuel
consumption in order not to end up over-hedging if demand falls and their
fuel short of their forecasted levels.
Thota Nagaraju BITS-Pilani Hyderabad Campus Derivatives and Risk Management Summer Term 2016-17
