The assignment needs detail understanding of hedging and derivatives. You have to be very specific...

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The assignment needs detail understanding of hedging and derivatives. You have to be very specific and to the point when you answer the questions asked in the assignment. There are three questions one has to be answered in approximately one page the other two in approximately half a page each

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Airline hedging The goal of this project is to determine the trades Qantas would need to make at the end of a financial year to hedge (part of) its exposure to jet fuel prices over the next financial year. At the end of June 2014, you are being hired by Qantas management to develop a jet fuel hedging strategy for the 2014-2015 financial year. Data In the Excel workbook available on the LMS, you will find end-of-quarter prices for the spot jet fuel (kerosene) contract in USD per gallon (3.785 litres), as well as the end-of- quarter prices of futures contracts in crude oil in USD per barrel (158.97 litres) and natural gas in USD per Million British Thermal Units (MBTU). A crude oil futures contract specifies delivery of 1,000 barrels, and a natural gas futures contract specifies delivery of 10,000 MBTU. Prices are observed at the end of the September, December and March quarter. For the futures data, the delivery is for the next quarterly expiration. That is, the price recorded at the end of September is for the futures contract that expires in December, the price recorded at the end of December is for the futures contract that expires in March and the price recorded at the end of March is for the futures contract that expires in June. In addition to the data in the Excel sheet, you may use that the spot prices for jet fuel on 30/06/2013 and 30/06/2014 were USD 3.014 per gallon and USD 1.666 per gallon, respectively. Background Qantas consumed about 4.6 billion litres of jet fuel during the 2013-2014 financial year (Qantas Fuel Efficiency Report). Let’s assume that use has remained constant for a while and is therefore also the expected use during the 2014-2015 financial year. Qantas buys its jet fuel quarterly in advance. That is, at the end of June 2014, Qantas purchases ¼ of its forecasted annual jet fuel use in the spot jet fuel market for use between July and September 2014. At the end of September 2014, Qantas buys ¼ of its forecasted annual jet fuel...

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David · Accepted Answer

Discussion: Hedging and derivatives – Risk management
Question-1
Hedging is one of the techniques in the risk managing armour in mitigating the risk. Hedging is a mechanism through which unfavourable impact from the movement of the market variables is reduced or averaged out. Hedging general involves assuming an inverse position (or in very primitive form assuming a diversified position) using physical instruments and/or derivatives. Primary objective of hedging is reducing the risk of loss or reduce the volatility in the profits. Hedging may lead to profit or loss depends up on the market movements, but motivation behind the hedging can only be reducing the risk, motivation if it become profiteering, then it no more can be called as hedging, but should rightly be called as speculation.
“Hedging strategy is expected to make profit. A strategy that loses money just shows that hedging is really not a good thing to do for companies.” is not a correct statement. Success of hedging strategy is measured by the loss that is prevented against adverse movement of market variables, but not about the profit making ability. Heading strategy if properly implemented would reduce the risk of the investment portfolio without compromising the return. Company may lose money (the investment it planned to protect) only when hedging is not done effectively or if company is trading under the disguise of hedging or the market movements are too abnormal rebutting all the assumptions made while hedging. Hedging per se has nothing to be blamed, success is depends on effectiveness of the hedge and gyration of market (Gup, 2011).

The assignment needs detail understanding of hedging and derivatives. You have to be very specific and to the point when you answer the questions asked in the assignment. There are three questions one...

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