1.
) hedging is alluded to as purchasing an advantage intended to diminish the danger of
misfortunes from another benefit. Supporting in money is a danger to the board technique
that manages to decrease and eliminate the danger of vulnerabilities. It assists with
confining misfortunes that may emerge because of obscure variances in the cost of the
speculation.
Pros: most of the business firm and industries frequently use hedging to stabilize the risk
and to ensure the rigid return, there is various pros and corns of the hedging are given
below.
It supports traders and enables them to stand during a hard time(market period).
To fix or reduce the trading risk associated with market uncertainty.
Minimize the extent of the looses.
It enables an investor to invest in the various class of asset because of liquidity
preferences
It requires the smaller margin outlay with the flexible price mechanism
Hedging helps to save time for the long term investor instead of daily market
variability or volatility
It offers a complex trading design to the investor to maximize their return.
It helps the financial market became more liquid.
Some times it offers the security shield from the inflation, price volatility, exchange
risk and other financial imbalances.
Hedging with the help of options is most likely to benefit.
Corns: While using the hedging strategy in the market has various kind of lose and
creates the market imperfection and might be the cause of huge economic loss.
It requires the huge cost that might be the cause of pegging of the entire profit.
According to the market rule of thumb, the return and risk are two faces of the
same coin, it means if someone is reducing the risk that might be the cause of
the reduction of the return.
Hedging is a very complex and hard strategy for the short term trader like a daily
trader.
It will give less return in normal or good market period because of efficiency.
Hedging with the help of (uses) futures requires comparatively huge capital.
Successful hedging requires very good knowledge of the market and good
experience.
It is always not easy to implement because of its complexity.
2.solution
Aviation industries most frequently use a hedging strategy to eliminate the market risk because the
fuel market is subject to huge volatility. Aviation industries that want to prevent huge fluctuation
in operating(fuel) expenses and bottom-line profit-making choose to hedge fuel prices. There
are two reasons while they use hedging in the fuel market, firstly the setup of the refining, and
secondly the low liquidity in the aviation fuel market. Airlines executives realize that it is frequently
difficult to give higher fuel costs to travellers by raising ticket costs because of the exceptionally
serious nature of the business. Since enormous carriers rival each other on the majority of the
courses they serve, they have little capacity to bring costs up because of higher fuel costs. For
instance, Continental Airlines revoked a charge climb in the wake of attempting various occasions to
help generally speaking passages. The aircraft said the airfare increments were because of high fuel
costs, however, extreme carrier rivalry has left the firm incapable to pass along fuel expenses to
clients.
We know that the pros and cons of the hedging and aviation industries always face fuel-
related uncertainty. If Oz jet wants to stabilize the risk and fix the return then they should hedge
their fuel market, then they should go for the listed strategies.
Hedge using plain vanilla swap (it is defining as the getting fixed exchange rate instead of the
flexible exchange rate) strategy for the jet fuel or swap of heating oil.
Hedging using call option: The should go for call option in the fuel market, it will enable OZ
jet to buy fuel at the fixed price until the maturity date of the contract.
Hedge using a zero-cost collar strategy: This strategy enables the Oz jet to adjust their
portfolio by using both call option and put option to create a zero profit spread to avoid the
loose in the fuel market.
Hedge using heat oil of crude oil features option: The price of heat oil and crude oil is highly
correlated with the price of jet fuel, so doing this might reduce the most of the risk and it
could be compensable.
Solution 3
According to the given estimates of the and statistical facts and figure presented by the director of
the Oz jet, we can conclude. Also given that all the statistics are resenting the significant figures.
Comment on the result.
Here R-square is 0.64, it means the variance of the dependent variable is explained 64% by
the independent variables. R-square represents the fitness of good of the model, so we can
conclude that the above model is likely to effect and can be used.
Significance of the statistics ensures the analyst to believe in the result. Only R-square
cannot ensure the validity and reliability of the model, here significant stats leads to make a
strong conclusion.
Finally, we can say that this model is quite effective and supported by the estimates.
Solution 3
If we want to roll the hedging position for the one year then we should go for the below-listed
factor.
The price of heat oil and crude oil: this is the most important factor that might increase the
goodness of fit of the given estimates
Cost of hedge: it will associate to the regression line with the negative sign.
The strategy of competitors: While considering this result we should go for an evaluation of
the competitor's strategy regarding jet fuel.
Geography: It is also the important factors that could affect the price of fuel due to
transportation cost, this factor also can be considered.
Exchange rate: It is also a significant factor that might affect the price of the jet fuel because
it is an important factor while performing any exchange activity in the international market
(crude oil exchange, capital transfer etc.
Reference:
1) Dave Carter, Dan Rogers, and Betty Simkins, Fuel Hedging in the Airline Industry:
The Case of Southwest Airlines.
2) https://www.lib.latrobe.edu.au/referencing-tool/apa-6
