Fine‐Tuning a Corporate Hedging Portfolio: The Case of an Airline |
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| Authors: | Mathias Gerner Ehud I Ronn |
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| Institution: | 1. DR. MATHIAS GERNER obtained his doctoral degree in 2011 from the European Business School in Germany with a focus on Energy Risk Management and Commodity Price Modeling. After completing his doctoral studies he gained professional experience in the energy trading environment as a Senior Energy Analyst at a major European utility firm. Since 2013 he works at Deloitte Consulting within the service line Strategy | Energy & Resources—focusing on energy companies in the electricity, oil, and gas sector.*;2. EHUD I. RONN is a professor of Finance at the McCombs School of Business, University of Texas at Austin. Dr. Ronn received his Ph.D. from Stanford University in 1983. During 1991-‘93, Dr. Ronn served as Vice President, Trading Research Group at Merrill Lynch & Co., and from January 2010 to February 2011 as Commodity Market Modeling practice area manager at Morgan Stanley & Co. Dr. Ronn was the founding director of the University of Texas Center for Energy Finance 1997–2009. Dr. Ronn's research, teaching and consulting have focused primarily on energy finance issues since 1997.* |
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| Abstract: | Industrial companies typically face a multitude of risks that could cause significant fluctuations in their cash flow. This is a case study of the hedging strategy adopted by an international air carrier to manage its jet‐fuel price exposure. The airline's hedging approach uses “strips” of monthly collars constructed with Asian options whose payoffs are based on average of “within‐prompt‐month” oil prices. Using the carrier's own implicit objective function based on an annual granularity, the authors show how the air carrier could fine‐tune its current hedge portfolio by adding tailored exotic options. The article describes annual average‐price options, provides an explicit valuation of them, and considers how such instruments may affect corporate liquidity. Consistent with its annual objective function, the airline made this exotic derivative the central tool to hedge across all potential realized values of annual jet‐fuel spot prices. The authors believe this modified portfolio is better suited to address the firm's hedging cost and its overall exposure to jet‐fuel price fluctuations. |
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