How is jet fuel traded?

By Sunil Kumar

Jet fuel is rarely traded in exchanges and usually involves hedging; an “over-the-counter” futures contract between two parties.

Fuel prices and airline profits are volatile; so to stabilize this component in their balance sheet; jet fuel is traded using a combination of a call and put option called a “collar”.

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Hedging on exchanges such as NYMEX and SIMEX is assumed to reduce counter-party risk. Most major airlines have been doing jet fuel hedging for a considerable time. Air India was permitted by the RBI to do the same; only in 2003.

Chinese airlines such as Air China, China Southern Airlines Co. and China Eastern Airlines follow a no-hedge policy and buy mostly from local petroleum corporations. This is in contrast to other airlines in the region; including Cathay Pacific and Singapore Airlines.

 

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