Jet Fuel Hedging Strategies for the Department of Defense Through Use of Financial Derivatives

The primary purpose of this research is to assess the practicality of utilizing some of the financial derivative products available on the market today in an effort to mitigate monetary losses due to the increasing price of jet fuel, thereby increasing stability in the DOD budget. The scope of this research will focus on the use of futures and call option contracts. Domestic jet fuel expenditure data was collected for Fiscal Years 1996 to 2007 and cross-referenced with the contract process of the previously mentioned financial hedging instruments during the same period of time. Results from the ex post facto analysis indicate that hedging with either heating oil futures or heating oil call options would have provided a tremendous overall savings to the DOD. Currently the DOD does not hedge its budget against fluctuation in the jet fuel spot market. The implication from this study is that the DOD should consider hedging its jet fuel exposure with either derivative, in particular call options as it is tailored for risk adverse customers.

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