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Old 6th Jul 2005, 08:06
  #31 (permalink)  
2Donkeys
 
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The volume of AVGAS produced and consumed globally is absolutely tiny, despite it forming the backbone of our hobby.

As a result, there are very few if any organisations who use significant quantities of AVGAS, and are sophisticated enough to be able to hedge it. When we talk about hedging AVGAS exposure, we are strictly in the realms of the theoretical.

The basis of any hedge where there is no traded market in the product under risk is to find another product which moves broadly in line with the thing you wish to hedge. You are not looking for something which has the same absolute price, only something which moves proportionately the same as your primary product in a strongly correlated fasion.

The primary price consituent of AVGAS is crude oil, and the futures and options markets for Crude are vibrant and easily traded. That makes them a good hedge.

MOGAS prices are subject to all sorts of political interference making them rather less attractive as a hedge. Accordingly the futures and options markets for MOGAS are relatively small. This brings its own problems. As anybody has ever tried to buy or sell something on an illiquid market will tell you, the spread between purchase and sale price will be wide. This constitutes a risk in itself.

2D
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