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Old 5th Jul 2005, 18:22
  #27 (permalink)  
2Donkeys
 
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Airlines can't directly hedge Jet Fuel prices since there is no sufficiently liquid market of exchange traded Jet Fuel Futures or Options.

As a result, Jet Fuel is hedged using either OTC (Over the Counter) Derivative products in conjunction with Investment Banks, or more commonly by hedging on closely correlated exchange-traded alternatives such as Heating Oil.

This exposes the airlines to so-called "basis risk"- the risk that the proxy does not move in the same manner as the thing being hedged. However, experience has shown that Heating Oil does act as a remarkably good proxy for Jet A.

Either way, the futures markets continue to indicate a gentle but sustained rise in Jet A prices.

2D
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