In 2003, trading of commodity futures shifted from single commodity, regional exchanges to national exchanges that trade multiple commodities. This paper examines price discovery and hedging effectiveness of commodity futures after this... more
In 2003, trading of commodity futures shifted from single commodity, regional exchanges to national exchanges that trade multiple commodities. This paper examines price discovery and hedging effectiveness of commodity futures after this change and concludes that, on average, futures prices do discover information relatively efficiently, but helps to manage risk less efficiently. The paper uses the viewpoint of the hedger to conjecture what factors may improve hedging effectiveness. These include high settlement costs caused by few and widely dispersed delivery centers and an unreliability of warehouse receipts, a mismatch between the grade specified in the futures contract and what is available for delivery in the market, and disruptions caused by various policy interventions in both commodities spot and futures markets.
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.
