Helena Morales wants to backtest a WTI hedge versus a Brent hedge. She takes a monthly hedge position of 20 million gallons for 2012. This corresponds to a hedge totalling 240 million gallons, which is about 45.7% hedge ratio if the annual gallons consumed stays flat at 525 million gallons. Assume (unrealistically) that JetBlue would use a simple futures hedge (note: the WTI and Brent exchange-traded futures contracts are for 1,000 barrels = 42,000 gallons). Now use the 60 months of the 2007 to 2011 historical prices on jet fuel, WTI, and Brent to simulate what would have been the monthly jet fuel costs under three scenarios: (1) without a hedge; (2) with a WTI hedge; and (3) with a Brent hedge. Would any hedge have helped reduce fuel cost volatility?

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