Abstract
Jet fuel prices are highly volatile and outside airlines’ control, incentivizing them to reduce earnings volatility through financial hedging. Due to limited direct hedging options, airlines often resort to cross-hedging of jet fuel requirements. In this paper, we propose a composite jet fuel cross-hedging approach, shown to provide substantial performance benefits relative to a traditional single instrument strategy. A mimicking portfolio approach, incorporating multiple hedging instruments, is found to provide additional hedging gains. Finally, we demonstrate that further hedging effectiveness is achieved by adding recently introduced jet fuel swap contracts to a hedge portfolio.
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