Fine-Tuning a Corporate Hedging Portfolio – The Case of an Airline Company

43 Pages Posted: 11 Mar 2012

See all articles by Mathias Gerner

Mathias Gerner

European Business School Oestrich-Winkel - Department of Finance

Ehud I. Ronn

University of Texas at Austin - Department of Finance

Date Written: January 1, 2012

Abstract

Non-financial companies typically face a multitude of risks potentially leading to significant fluctuations in the firm’s cash-flows. This paper presents a case study approach demonstrating the hedging strategy employed by an international air carrier managing its jet-fuel price exposure. We contribute to the academic discussion on an optimal mix of linear and nonlinear hedging instruments by providing an in-depth analysis of the firm’s hedging policy and its derivative usage. Using the carrier’s self-defined implicit objective function based on annual granularity, we show that the air carrier could fine-tune its current hedging portfolio by adding tailored exotic options. Specifically, we develop an annual average-price option and incorporate this derivative into the company’s hedging portfolio, leading to a superior position in terms of hedging cost and the firm’s overall gross exposure to jet-fuel price fluctuations.

Keywords: corporate hedging policy, exotic derivatives, futures and options, commodity risk

JEL Classification: F30, G30, G32

Suggested Citation

Gerner, Mathias and Ronn, Ehud I., Fine-Tuning a Corporate Hedging Portfolio – The Case of an Airline Company (January 1, 2012). Available at SSRN: https://ssrn.com/abstract=2019904 or http://dx.doi.org/10.2139/ssrn.2019904

Mathias Gerner (Contact Author)

European Business School Oestrich-Winkel - Department of Finance ( email )

Gustav-Stresemann-Ring 3
Wiesbaden, Hessen 65189
Germany

HOME PAGE: http://www.ebs.edu/

Ehud I. Ronn

University of Texas at Austin - Department of Finance ( email )

Graduate School of Business
Austin, TX 78712
United States
512-471-5853 (Phone)
512-471-5073 (Fax)

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