Originally Posted by
jollygreensg
Ive got to ask
What the heck is hedging. I'm reading all this but still trying to figure it out. Can someone please explain?
Buying fuel in either the over-the-counter or exchange traded derivatives markets.
Read this:
http://www.kellogg.northwestern.edu/...s/jet_fuel.pdf
Here are the cliff notes:
Δ Jet Fuel Spot Price – H * Δ Futures contract
where H is the hedge ratio.
The value of H will determine the number of futures contracts to enter. It is calculated as follows:
H = ρ * σ [spot] / σ [futures]
where:
ρ: the correlation between the spot jet fuel price and selected futures contract
σ: the standard deviation, or volatility, of each respective contract
SWA has always been at the top of the heap in terms of controlling cost, although there is an emphasis on the revenue side of the balance sheet as the cost side grows outside of forecast levels.