Case Study Questions: Jet Blue Airlines Fuel Hedging
Read the case study
Answer the questions in an essay format. 8 pages including reference page
Please show work and add the Excel spread sheet explaining your analysis. No plagiarism. Add references that can be found. No links that cannot be accessed if opened. No Wikipedia
1. Should Jet blue hedge its fuel cost?
Hint: Discuss the advantages and disadvantages of hedging for an airline.
2. How airlines hedge their fuel price risk?
Hint: discuss various strategies such as call, put, forwards, futures
Discuss why they have to cross hedge using other derivative instruments such as crude oil and heating oil.
Why did the company reduce its hedging in 2009? Why did it switch from heating oil to crude oil and jet fuel after 2009.
3. What is crack spread and how is it calculated?
Hint:Difference between the price of jet fuel and other products produced from crude oil and the price of crude oil. Barrel of crude oil produces how much jet fuel
Suppose we consider buying oil and selling gasoline and heating oil in August. On June 2, 2004, the July futures price for oil was $39.96/barrel or $0.9513/gallon (42 gallons in a barrel). The August futures price for unleaded gasoline and heating oil were $1.2427/gallon and $1.0171/gallon. The 3-2-1 crack spread means that we can produce from 3 gallons of crude oil 2 gallons of gasoline and 1 gallon of heating oil.
Therefore the "Crack Spread" is
2 x ($1.2427) + $1.0171 - (3 x $0.9514) = $0.6482 * (42)/3 = $9.0748/barrel
4. What risks are hedged and what risks are unhedged?
Hint: Price vs Quantity risk
Why do airlines avoid hedging 100% of their fuel consumption or avoid being "overhedged"
5. Based on the recent 2007 to 2011 is there a reason to switch from WTI to Brent hedging?
Hint: Use the regression analysis and do a correlation test. Pick the one which has the higher regression coefficient.
Attachment:- 2012 Fuel Hedging.rar