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.

Format of the assignment report:

Executive summary (Highlight key results and the main recommendation in one paragraph (100 words).

Analysis section (900 words divided as you see fit across 3 questions)

Answer the three questions raised above and take note of the following:

When answering question 1, report the statistical table of estimates, explain the estimates, and show/type all equations that you are using in your calculations. You are expected to provide an analysis based on estimates or calculations in answering question 1 or any other question where it is necessary to do so.

All questions are analytical and require reasoning.

When answering question 3, use research papers as a reference and report arguments in line with what you what to communicate. You must provide an inline reference that includes the page of the paper/report/article you are referring to and provide an appropriate reference list at the end of the assignment using the APA referencing style provided by the library (See some examples below).

Description of the dataset

The dataset is collected from Bloomberg and contains a time series for:

• Spot market Jet Fuel (see snapshot for selected specs)
• HO1 Commodity (contract size 42000 gallons see a snapshot in the datafile, and
• CO1 Commodity (contract size 1000 barrels see a snapshot in datafile for selected specs)

See the data file in Excel. Weekly observations are provided for all data. The commodities follow the January cycle.

You may find contract specs on exchange websites. Here is one example for HO1:

https://www.cmegroup.com/trading/energy/refined-products/heating-oil_contract_specifications.html#)

The data file contains 4 main fields:

PX_LAST is the last traded price for the week

PX_SETTLE is the Settlement Price

PX_VOLUME is the traded volume

OPEN_INT is the open interest.

Turn in paper include: Executive Summary (100 words + or 10%)

Results (regression models)

Tables should be neat and well presented. Use 3 decimal points.

Table 1

Table 2 and so on

Analysis (900 words +/- 10%)

In this section you provide your answers.

You are expected to type any equations used to support your analysis and report calculated figures.

Q1 (Answer)

Q2 (Answer)

Q3 (Answer)

(There are tables but chegg say my question is too long)