Fuel Hedging using CL Call Options

[bone]

Quote from OddTrader:

Thanks Bone. I think the above statement is easy to say but very difficult to resolve the issue regarding how to do proper hedging for fuel, as whether it is technically feasible to find a viable solution, I just wonder.

Proper dynamic hedging requires upper management knowledge and complete ownership.

Any good spread trader with an intimate knowledge of the Company's cost basis and forward commodity requirements can structure a competent hedging program if indeed that individual is empowered by the Company's Directors to make the required transactions.

 

[OddTrader]

Quote from bone:

Proper dynamic hedging requires upper management knowledge and complete ownership.

Any good spread trader with an intimate knowledge of the Company's cost basis and forward commodity requirements can structure a competent hedging program if indeed that individual is empowered by the Company's Directors to make the required transactions.

Good luck Bone. Perhaps you should try promoting your own hedging service as well. Probably any hedging losses for the whole airline industry then would then saved because of your contribution of Unique knowledge that is possibly unknown to the world yet!

 

[ogarbitrage]

Quote from OddTrader:
"Unfortunately we are not hedging at the moment. When we realised that we had to hedge, it was already too late," he said.

"Once the oil prices go down, then of course we will hedge."

From Reuters (UK)

Unquote

LOL!

Quote from ogarbitrage:

Hedge when you can, not when you have to.

 

[OddTrader]

A couple of informative articles from a specialist web site that I found:

Fuel hedging

http://www.flightglobal.com/news/articles/fuel-hedging-322650/

Q

After the rapid fall in oil prices since last summer airlines could be forgiven for thinking their fuel nightmares were over. But fuel hedging which helped to mitigate rocketing fuel prices in the first half came back to haunt many in the final quarter.

Airlines that struck fuel hedging agreements around the $100 to $120 mark, which appeared attractive when fuel was climbing towards $145 and threatening to go ever higher, have caught a cold. Few could have imagined the speed of the fall that followed. Consequently fuel hedging losses have dominated a host of balance sheets over the last few weeks.

UQ

Hedge Your Bets

http://www.flightglobal.com/news/articles/hedge-your-bets-314880/

Q

"Airlines should look at hedging as a _strategic device that keeps them on an even keel and avoids extremes," says Leo Drollas, deputy executive director and chief _economist at the London-based Centre for Global Energy Studies. But he adds that there is a tendency for airlines to hedge tactically rather than _strategically, meaning they are "either too heavily hedged or too light on hedging, so they lurch from one situation to another".

"Airlines that have been hedging heavily in the last few years have done well. But if the price dives some time this year or early next year, they will get a caning," says Drollas. An airline that follows a strategic approach to hedging will "look at what's a good price in, say, a three-year period and whether there's a strategic need to hedge", according to Jon Bell, relationship director for airports and airlines at London-based Barclays. Tactical hedging, on the other hand, is "shorter-term and done on the basis of volatility", says Bell.

UQ

 

[OddTrader]

Hedging shipping's fuel costs

http://www.cges.co.uk/resources/articles/2009/12/14/hedging-shipping-s-fuel-costs

Q

The efficacy of bunker fuel hedging can best be gauged by looking at a rolling hedge's profit and loss account over a long period. Our representative rolling hedge is based on a consumer of bunker fuel purchasing 3-month WTI oil futures and holding these futures contracts till expiry on a rolling monthly basis.

By comparing the average spot WTI price of a particular month with the price of the 3rd-month WTI futures contract three months earlier it is possible to obtain a measure of the success or otherwise of the hedge. Naturally, during periods when oil price is on a rising trend the rolling hedge would yield gains for the shipping company and vice versa during periods of declining oil prices

During the long oil price bull-run from March 2007 till early July 2008 the rolling hedge would have yielded handsome profits, but when oil price began to weaken thereafter, eventually crashing in the third quarter of 2008, the profits turned to losses, which eventually became onerous and would have led many ship owners to question the entire validity of hedging.

UQ

 

[OddTrader]

Quote from OddTrader:

... is easy to say but very difficult to resolve the issue regarding how to do proper hedging for fuel, as whether it is technically feasible to find a viable solution, I just wonder.

Intriguing indeed!

Q

http://en.wikipedia.org/wiki/AMR_Corporation

On 29 November 2011, AMR Corporation filed for Chapter 11 reorganization bankruptcy. The Air Transport Association group said that unofficial research states that AMR was the 100th airline company to go into bankruptcy protection since 1990.

http://travel.usatoday.com/flights/post/2011/11/amr-100th-bankrutpcy-since-1990/574727/1

The bankruptcy filing today by American Airlines parent AMR marks the 100th airline bankruptcy since 1990, according to an "unofficial compilation of research" by the Air Transport Association trade group.

UQ

Just not knowing how many of them were caused by hedging losses!

 

[bone]

Quote from OddTrader:

Just not knowing how many of them were caused by hedging losses!

More likely scenario is that they were under-hedged or not hedged given the current cost of fuel and the timing of the announcement.

 

[bwolinsky]

If the intent was to hedge Fuel, I certainly don't get why RBOB GAS wasn't the first choice. Maybe liquidity, but there's no liquidity in CL options so that issue's moot.

This thread is littered with plagiarism, and the OP appears to have given up this thread after several losses.

 

[atticus]

Quote from bwolinsky:

If the intent was to hedge Fuel, I certainly don't get why RBOB GAS wasn't the first choice. Maybe liquidity, but there's no liquidity in CL options so that issue's moot.

This thread is littered with plagiarism, and the OP appears to have given up this thread after several losses.

I am confused. Is this clown a truck driver? Owns a railroad? Logistics Co.? What exactly is he hedging?

 

[bone]

From my experience as a commercial energy trader, the biggest hurdle in the past at least was or is the accounting means testing for FASB 133 compliance. In the past, the CL contract did not have a high enough positive correlation to Jet Fuel for an Airline to use it as a JP A or A-1 or JP B hedge. They frequently used Heating Oil or the ICE Gas/Oil contract or went OTC.

BTW, if you use a good broker like Amerex or ICAP Chapel Hill or TFS you can get a few thousand CL options ( and at a better bid / ask spread than the Nymex floor for a 50 lot ATM ) if you use the ICE Swaps or Nymex ClearPort for financial clearing.