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Cross hedging jet-fuel price exposure

Zeno Adams () and Mathias Gerner

Energy Economics, 2012, vol. 34, issue 5, 1301-1309

Abstract: This paper investigates the cross hedging performance of several oil forwards contracts using WTI, Brent, gasoil and heating oil to manage jet-fuel spot price exposure. We apply three econometric techniques that have been widely tested and applied in the cross hedging literature on foreign exchange and stock index futures markets. Using quotes from the financial industry on forward contracts, we can show that the optimal cross hedging instrument depends on the maturity of the instrument's forwards contract. The results highlight that the standard approach in the literature to use crude oil as a cross hedge is not optimal for time horizons of three months or less. By contrast, for short hedging horizons our results indicate that gasoil forwards contracts represent the highest cross hedging efficiency for jet-fuel spot price exposure, while for maturities of more than three months, the predominance of gasoil diminishes in comparison to WTI and Brent.

Keywords: Cross-hedging; Hedge ratio; Futures and forwards; Crude oil; Error correction model (search for similar items in EconPapers)
JEL-codes: F30 G30 G32 (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:34:y:2012:i:5:p:1301-1309

DOI: 10.1016/j.eneco.2012.06.011

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Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant

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