Assignment

Assume that you were approached by the CFO of USC Airlines, an established hypothetical airline based in the US and operates internationally to selected destinations.

The CFO is debating the effectiveness and business viability of hedging jet fuel and is seeking your advice. Her opinion is mainly driven by an international report that shows that not all airlines hedge jet fuel. USC consumes an average of $60 million of fuel per year and allocates these expenses evenly across each month of the year.

In your capacity as a Risk Analyst who is familiar with Derivative products you are tasked to advise the CFO about hedging Jet fuel oil. Your advice is driven by an empirical assessment using a dataset provided in an Excel file and your understanding of hedging using futures.

You are expected to advise the CFO on

1-Establishing a hedging strategy that includes setting a hedging position and evaluating its effectiveness and explain whether it is favorable for USC Airlines. (Note: This requires using the optimal hedging ratio based on the OLS regression method to conduct relevant calculations. You are expected to explain the results and all calculations).

2-Justifying the choice of an appropriate hedging asset from the two assets provided.

3-Critique the hedging strategy proposed in answering question 1.