Fine-Tuning a Corporate Hedging Portfolio – The Case of an Airline Company
43 Pages Posted: 11 Mar 2012
Date Written: January 1, 2012
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: Suggested Citation