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Hedging
Student’s Name
Institutional Affiliation
Course
Instructor’s Name
Date
, 2
Hedging Exercise
Trading Objectives
This project has several objectives. Firstly, the main objective for the next 3 months is to
ensure that the organization has a continuous supply of jet fuel oil (replaced by Crude oil to
assume). Secondly, the exercise aims to purchase 10,000 barrels of jet fuel oil into parts that
keep the operations going. Finally, the aim is to develop a cost saving approach where the
$100,000 available at the beginning will only use at minimum 70% to hedge oil price risk while
30% will be used in speculating purposes to earn short term profits in deals not limited to energy
features.
Summary of the Hedging Strategy
The main hedging strategy is Future through a short hedge. In this approach, the investor
seeks to gain protection against the risk of loss due to changing prices in the cash market. A short
hedge is essential when the investor plans on selling the product in a future date but wants to
benefit in a situation they speculate the price will rise by the end of the maturity period
(Carmona and Durrleman, 2003). In this case, the acquired jet oil producer sells an oil short
hedge by buying back their future contract. The prediction is that if there is a drop in cash market
prices, it would mostly be offset by a gain in the futures transaction. Therefore, it is essential to
hedge a reasonable amount of investment, at least $70,000.
It is essential to hedge the jet fuel price risk due to the inconsistency in the oil market,
which provides a high return potential. Using the short hedge future strategy, the acquired assets
can be subjected to time decay and reduce in value as the maturity period approaches. Therefore,
our project will apply vertical put spreads of at least 30% of the 10,000 barrels. This approach
Hedging
Student’s Name
Institutional Affiliation
Course
Instructor’s Name
Date
, 2
Hedging Exercise
Trading Objectives
This project has several objectives. Firstly, the main objective for the next 3 months is to
ensure that the organization has a continuous supply of jet fuel oil (replaced by Crude oil to
assume). Secondly, the exercise aims to purchase 10,000 barrels of jet fuel oil into parts that
keep the operations going. Finally, the aim is to develop a cost saving approach where the
$100,000 available at the beginning will only use at minimum 70% to hedge oil price risk while
30% will be used in speculating purposes to earn short term profits in deals not limited to energy
features.
Summary of the Hedging Strategy
The main hedging strategy is Future through a short hedge. In this approach, the investor
seeks to gain protection against the risk of loss due to changing prices in the cash market. A short
hedge is essential when the investor plans on selling the product in a future date but wants to
benefit in a situation they speculate the price will rise by the end of the maturity period
(Carmona and Durrleman, 2003). In this case, the acquired jet oil producer sells an oil short
hedge by buying back their future contract. The prediction is that if there is a drop in cash market
prices, it would mostly be offset by a gain in the futures transaction. Therefore, it is essential to
hedge a reasonable amount of investment, at least $70,000.
It is essential to hedge the jet fuel price risk due to the inconsistency in the oil market,
which provides a high return potential. Using the short hedge future strategy, the acquired assets
can be subjected to time decay and reduce in value as the maturity period approaches. Therefore,
our project will apply vertical put spreads of at least 30% of the 10,000 barrels. This approach
