Highlights: • A major variable cost in airline operations is aviation fuel. • Fuel price increases provide considerable risk to airline profitability. • Hedging fuel costs mitigates this risk. • Hence, hedging should increase corporate... more
Highlights: • A major variable cost in airline operations is aviation fuel. • Fuel price increases provide considerable risk to airline profitability. • Hedging fuel costs mitigates this risk. • Hence, hedging should increase corporate value. • This research provides statistical support that hedging does indeed increase corporate value.
Abstract: This paper examines whether fuel hedging increases the value of US airline companies as captured by their associated stock prices. Airline companies hedge fuel in order to reduce exposure to rising fuel prices, but does this add value to the firm? Using a sample of seven major US airline companies over the period from 2005 – 2011, this study discovers that fuel-hedging activities are positively correlated to firm value. It was hypothesized that airline companies that hedge fuel will see less of a negative impact to their stock price when fuel prices surge and will have less exposure to losses during oil price spikes. After closer statistical examination of this data, the particular relationship can be confirmed. Additionally, multiple and single variable regression analysis suggests that the combined fuel related costs and hedging activities show a good predictive ability to firm value. It thus confirms that hedging fuel derivatives causes a stabilizing and positive effect on a company’s value.
This article examines the cross-hedging performance of crude futures against the tyre equity futures to hedge the tyre equity stocks. Three multivariate conditional volatility models, namely constant conditional correlation (CCC), dynamic... more
This article examines the cross-hedging performance of crude futures against the tyre equity futures to hedge the tyre equity stocks. Three multivariate conditional volatility models, namely constant conditional correlation (CCC), dynamic conditional correlation (DCC) and diagonal BEKK are applied. Using the conditional covariance and variance from the MGARCH estimates, the optimal hedge ratios (OHRs) are computed. The results of this study show that the volatility spillover exists between the returns of crude oil futures and tyre equity. However, for tyre equities, the best cross hedge is tyre equity futures rather than crude futures. All the MGARCH estimates show better hedging possibility with tyre equity futures, particularly MRF futures.
