Task and Mark distribution:

Scenario

You are a commodity manager hedging British Airways price exposure to jet fuel oil for the next 2 years. The company requires 100,000 gallons per month (1,200,000 gallons p.a.) of jet fuel oil. Time period is Jan21-Dec21.

Task/ Procedure

In a report of no more than 1000 words, create a risk management strategy to explain how to minimise BAs price risk exposure. It is expected that you will explain your strategy, using your own data and your own research, your hedging strategy in order to minimise price risk. Your strategy can include the use of swaps, options, futures, complex hedging strategies and buying on the spot and also not hedging certain time periods at all. Append all your workings/ calculations to the report.

Your submission must Include the following as a minimum:

• An appropriate strategy

• Evaluate and discuss each contract used individually, over which time period? and the calculations? For example if you decide to hedge the full 100,000 gallon of Jan20 with an option at which strike price, what premium will you pay, what is the payoff for this and the benefits and drawbacks.

• Appraise the benefits and drawbacks of the strategy as a whole

• You may also construct scenarios to explain what will happen to my position if the market rises or falls.

• Construct numerical examples using your data. There after you can develop your own pricing provide its realistic. [HINT: premiums are higher in the money than out of the money]

• Critique your strategy by discussing why this strategy may not be effective and the risks associated

• Clearly conclude with a summary of the strategy and the salient points.

• Use of appropriate graph, tables and appendix efficiently use the word count.

• Use of academic references to support your argument.