Ahmed, Mohamed Mostafa Elsayed
(2023)
Cross-hedging effectiveness of jet fuel oil spot prices with future contracts.
[Dissertation (University of Nottingham only)]
Abstract
This study investigates the cross-hedging performance for jet fuel oil spot prices with four highly correlated commodities' future contracts; namely, NYMEX Light Sweet Crude Oil (WTI), ICE Europe Brent Crude, NYMEX Harbor No. 2 Heating Oil, ICE Europe Low Sulphur Gasoil with four different time frame contracts from one-month maturity up to four-month maturity to estimate an optimal hedge ratio that aviation firms can utilize to hedge away the jet fuel oil prices volatility.
As known, the level of correlation and the contract time to maturity are fundamental determinants in the hedging process; therefore, we are studying the best commodity among our commodities’ future contracts candidate, as well as the most effective maturity that can produce a minimum variance hedge ratio to jet fuel oil spot prices.
We use daily time series data for all spot prices and future contracts prices from Jan 2nd 2014, until Aug 1st 2022, as we seek to investigate the effect of the Covid-19 outbreak as well as the Russian war in Ukraine on the cross-hedging effectiveness, moreover we used nine airline firms from Southeast Asia region as exploratory data to highlight the financial performance trends along the studied period.
We utilize four econometrics techniques to apply the required estimations, which are OLS, VECM, and VAR estimators to estimate a constant hedge ratio along the study timeframe and MGARCH estimator to generate a dynamic hedge ratio which can capture the changes in the optimal hedge ratio before and post to the pandemic and the war.
Our main findings have complied with some of the literature pieces’ results to suggest that ICE Europe Brent Crude with 1-month maturity and NYMEX Harbor No. 2 Heating Oil with two and three-month maturities outperformed all other products and maturities, ICE Europe Low Sulphur Gasoil with three-month maturities could come as a third alternative. At the same time, the NYMEX Light Sweet Crude Oil (WTI) showed the lowest effective hedge ratio among all other options.
Lastly, due to the severe volatility in assets’ prices during the pandemic and war, the effectiveness of the cross-hedging declined during that time relative to the period before the pandemic and war.
This study will be presented in 6 main sections to include, introduction, literature review, data, methodology, results and interpretations and conclusion, respectively.
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