This is a paper that is focusing on the if hedging is beneficial for USC Airlines discussion. The paper also provides additional questions to focus in writing the assignment paper.
Is hedging beneficial for USC Airlines?
Assume that you were approached by the CFO of USC Airlines, an established hypothetical airline, in your capacity as a Risk Analyst who is familiar with Derivative products.
The CFO is debating the effectiveness and business viability of hedging jet fuel and also is seeking your advice. Her opinion is mainly driven by an international report that shows that not all airlines hedge jet fuel.
Question 1: (250 words)
The CFO is concerned about the strategic decisions of competing airlines. Airline fuel is a significant operating expense to airlines in general and may have significant price volatility. At the same time hedging using futures might be quite costly.
Given the statement above. Discuss whether hedging is beneficial for USC Airlines.
You are expected to use various resources to justify the points you raise in answering question 1. Additionally, you must provide a reference list at the end of the report and use inline citations which include the page number of each resource used.
If hedging is beneficial for USC Airlines discussion
Question set 2: (750 words.)
The CFO appreciates a concrete hedging analysis to validate your advice in your answer to Question 1.
A dataset is collected from trading platforms and also is provided for:
Spot market Jet Fuel,
HO1 Commodity (Future), and
Also, CO1 Commodity (Future).
See the data file in Excel (uploaded). The file contains a description of the data series as if you are accessing the market yourself.
2 a- Firstly, estimate and interpret the minimum variance hedge ratio for each of the future commodity. Use the OLS method and comment on the significance of the results. (Support files for using regressions in OLS are provided). Use the full sample in your estimation.
b- Secondly, discuss whether differences in the hedge ratio between the two commodities will have any effect on the effectiveness of the hedge.
c- Thirdly, recommend a convenient hedging strategy to the CFO using the data provided and explain the corresponding hedging position.
d- Fourthly, what are the potential factors that may weaken your suggested strategy. Discuss
(Calculations do not count as words)
Research and Inquiry
Besides, you are to do research and inquiry and also get 2 articles using an online search that you use in supporting arguments used in your discussions. These include professional or academic articles.
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