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Cross Hedging Jet-Fuel Price Exposure

Zeno Adams & Mathias Gerner

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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. 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.
   
type journal paper
   
keywords Cross-hedging; hedge ratio; futures & forwards; crude oil; error correction model.
   
language English
kind of paper journal article
date of appearance 9-2012
journal Energy Economics
publisher Elsevier Science (Amsterdam)
ISSN 0140-9883
ISSN (online) 1873-6181
DOI 10.1016/j.eneco.2012.06.011
volume of journal 34
number of issue 05/2012
page(s) 1301-1309
review double-blind review
   
profile area SEPS - Quantitative Economic Methods
citation Adams, Z., & Gerner, M. (2012). Cross Hedging Jet-Fuel Price Exposure. Energy Economics, 34(05/2012), 1301-1309, DOI:10.1016/j.eneco.2012.06.011.