Trading objectives:

There are two trading objectives must achieve: hedging and speculation. Hedging risk aims to
reduce market risk, particularly reducing price fluctuations. As a jet fuel producer, selling 12,000
barrels in 3 months at a fixed price is crucial, allowing the company to gain benefits when the
price is higher. Second, speculation trading focuses on maximizing extra profits by engaging in
risky investments, particularly this speculation trading focuses on gold futures price, which is
expected to rise significantly in over 3 months.

Hedging trading:
Price forecast:
The hedging strategy will be based on current and forecast of the jet fuel price movement.
Currently, global average jet fuel price dropped by 3.7% in price to $106.89/bbl. (IATA 2024).

In short terms, two trends affecting jet fuel price movements including:

 Decreasing price factors:

Sustainable Aviation Fuel (SAF) is newly introduced as replacement for conventional jet fuel
with lower lifecycle GHG emissions by 50% (Morciani 2024). According to EPA data, an
increasing production of SAF by 53% to 12.1 million gallons in 2023 is promising; however, the
supply accounted for only 0.1% of fuel consumption, showing little impact on price movements.
Besides, new five-month highs for the dollar index at 106.13 under the higher-than-expected
inflation data pushing more concerns for new US rate-cut expectations, lowering demands as US
oil became more expensive (Chavez-Dreyfuss and Bentley 2024).

 Increasing price factors:

According to IATA, an increase of 21.5% in demand for air travelling is witnessed as optimism
derived from decarbonization investments and tourist resilience of geopolitical and economic
uncertainty (Syme 2024). Moreover, fears of Middle East put pressure on supply disruptions,
making oil prices increase significantly, economists expect crude oil prices (Brent), could rise to
$92 a barrel before surpassing $100 a barrel next year (Elliott 2024). US oil supply inventories
decreased in April to 816M, reducing ongoing supplies (Ycharts 2024).

Overall, since the increasing price factors are more significant; hence, jet fuel price is likely to
increase in the short term.

Strategy:
Since there are no specific futures for jet fuel price hedge, an alternative futures hedging will be
chosen for cross-hedge.

Crude oil futures are suitable as crude oil correlated 77% in price with jet fuel while jet fuel
derived directly from crude oil (Index Mundi 2024). Besides, since CME is a US commodity
trading market, buying WTI crude oil which derived from the US and being the high liquidity
products is preferable.

The number of hedging crude oils futures based on the minimum hedging variance ratio.

ρ∗σ s
Optimal contract =
σF

Based on own calculations using jet fuel price and WTI price in Excel file, the hedge ratio should
be 67.7%, meaning that 8,119 barrels should be hedged. As jet fuel price is forecasted to rise;
therefore, can reduce barrels hedged to 8,000 or 8 WTI crude oil futures contracts.

Hedging strategy:
Trading specs for WTI crude oil:

 Time: September 2024 (code: CLU4) as the price increases during the delivery time;
hence, the delivery time should be after the required selling time (3 months) to avoid
flattening contract:
 Required margin: total required margin is $58,080 ($7,260 per contract).
However, since the forecasting price of jet fuel is higher in the above analysis, as a seller, the
company has no incentives to hedging. Therefore, the analysis will NOT CONDUCT ANY
HEDGING; hence, only speculation trading is utilized.

Speculation trading:
Price forecast:
Speculation trading helps gain high profits in exchange for high risks. Currently, gold demand is
higher, making gold futures price is forecasted to rise significantly due to:

 Inflation level is higher than expected with PCE rise from 2.5% to 2.7% in February,
higher than expected by 0.1% (Butt 2024). Core inflation exceeded expectations by 0.2%
to 2.8%. Speculation is pessimistic about interest rates reductions not until September.
 The US dollar index dropped to 105.67 and US. Treasury Yields declined allow gold
investments as more lucrative investment as a safe-haven assets (Hyerczyk 2024).
 Geopolitical tensions in Russia-Ukraine and Israel-Hamas made gold appealing to central
banks, especially for China and India (Butt 2024). Central banks buy in during 2022-
2023 doubled 2016-2019 at 1,060 tons (Goldman Sachs 2024).

Speculation Trading:
Since there is no money allocated for hedging trading, 40% of $100,000 will be allocated for
speculation trading.

Trading specs for Gold Futures:

 Time: August 2024 (code: GQC4), the delivery time must be after the required selling
time (3 month) to avoid flattening.
 Position, buying price and quantity: Buying long at $2,380 per unit (on 11 April 2024)
for 3 contracts, since the gold price is forecasted to rise during the delivery time.
 Margin committed to trade: $33,000 in total ($11,000 per contract).
Trading result:

The chart illustrates a strong increase in gold futures price during the first three days of trading.
However, a high drop in gold price was witnessed on 22 April, resulting in a drop in accumulated
unrealized loss at -$7,000. Gold price dropped reflect on a subdued Middle East conflict, which
made investors move away to riskier assets like equity. The drop made the margin account
balance fall below 33,000; however, as there is still budget left since hedging is not utilized, the
company can put more on margin account balance.

Overall, the speculation trading resulted in a loss of $2,640 as investors move assets away from
non-interest assets like gold.

Conclusion:
In conclusion, both the hedging and speculation trading resulted ineffectively. Regarding hedging
trading, since the forecast resulted in rising jet fuel price; however, as a seller, the conditions are
favorable; therefore, it is not compulsory for hedging trading. Regarding speculation trading,
although the gold price is forecast to rise; however, during short-term, the sudden ease of the
Middle East has dragged the gold price off; hence, resulting a loss in speculation.
References:
Butt A (29 April 2024) ‘Gold Price Forecast: XAU/USD Hits $2,344 Amid Fed Rate Hold &
Rising Geopolitical Tensions’, Fxleaders, accessed 23 April 2024.
https://www.fxleaders.com/news/2024/04/29/gold-price-forecast-xau-usd-hits-2344-amid-fed-
rate-hold-rising-geopolitical-tensions/.

Chavez-Dreyfuss G and Bentley A (23 April 2024) ‘Dollar touches new 34-year peak vs yen on
US rate outlook’, Reuters, accessed 23 April 2024.
https://www.reuters.com/markets/currencies/currencies-calm-cautious-after-weary-week-2024-
04-22/.

Elliott L (25 April 2024) ‘Oil price could exceed $100 a barrel if Middle East conflict worsens,
World Bank warns’, The Guardian, accessed 25 April 2024.
https://www.theguardian.com/business/2024/apr/25/oil-price-could-exceed-100-a-barrel-if-
middle-east-conflict-worsens-world-bank-warns.

Goldman Sachs (22 February 2024) ‘Gold prices are forecast to rise 6% in the next 12 months’,
Goldman Sachs, accessed 23 April 2024.
https://www.goldmansachs.com/intelligence/pages/gold-prices-are-forecast-to-rise-six-
percent.html.

Hyerczyk J (29 April 2024) ‘Gold Prices Forecast: Short-Term Forecast Tied to U.S. Dollar, Fed
Moves’, FxEmpire, accessed 23 April 2024. https://www.fxempire.com/forecasts/article/gold-
prices-forecast-short-term-forecast-tied-to-u-s-dollar-fed-moves-1426908.

IATA (International Air Transport Association) (2024) Jet Fuel Price Monitor, IATA website,
accessed 19 April 2024. https://www.iata.org/en/publications/economics/fuel-monitor/.

Index Mundi (2024) Jet Fuel Daily Price, Index Mundi website, accessed 23 April 2024.
https://www.indexmundi.com/commodities/?commodity=jet-
fuel&months=120&commodity=crude-oil-west-texas-intermediate#google_vignette.

Morciani J (2024) Propelling forward: SAF and the path to a greener aviation industry,
Fastmarkets website, accessed 19 April 2024. https://www.fastmarkets.com/insights/saf-aviation-
industry-market-trends/.
Syme P (8 April 2024) ‘Demand for air travel is soaring, but it seems to be a less popular choice
for Americans’, Business Insider, accessed 19 April 2024.
https://www.businessinsider.com/north-america-lags-rest-world-air-travel-growth-iata-2024-4.

Ycharts (2024) US Stocks Crude Oil, Ycharts website, accessed 23 April 2024.
https://ycharts.com/indicators/us_stocks_of_crude_oil.