Page 55/56 of the following NYME document "A Guide to Energy Hedging" has an example (#15) for: Setting a "Cap" on Gasoline Prices by Buying Calls. http://www.opvest.com/OpVest/uploads/documents/education/energyhedge.pdf
Actually, the biggest problem with using CL options is that many Corporations need to hedge some sort of distilled downstream product, and the FASB accounting standards are very influential on a firm's bean counters. In fact, most airlines and trucking firms will NOT use the CL contract because of their accountant's interpretation of FASB standards - which means they go OTC for distilled products. And suffer terrible slippage. But accountants don't care about slippage.
I just did a simple search on Google for: fuel hedge with crude oil. Here are some of the results on the first page: "Fuel hedging http://en.wikipedia.org/wiki/Fuel_hedging The cost of fuel hedging depends on the predicted future price of fuel. Airlines may place hedges either based on future prices of jet fuel or on future prices of crude oil.[1] Because crude oil is the source of jet fuel, the prices of crude oil and jet fuel are normally correlated. " "Fuel Hedging in the Airline Industry: The Case of Southwest Airlines http://www.sba.pdx.edu/faculty/danr/danraccess/courses/fin562/hedging_case_crj_submission.pdf Airlines use derivative instruments based on crude oil, heating oil, or jet fuel to hedge their fuel cost risk. The majority of airlines rely on plain vanilla instruments " " Delta Air Lines shifts fuel hedges out of US benchmark http://www.ft.com/intl/cms/s/0/22323616-596f-11e0-bc39-00144feab49a.html 28 Mar 2011 â Delta and other US airlines have traditionally purchased contracts for US benchmark crude oil to hedge volatile jet fuel costs. Jet fuel is refined ... " ...
" Ryanair boss keeps losing by hedging his bets on oil price Robert Lea 5 Feb 2009 http://www.thisislondon.co.uk/stand...ps-losing-by-hedging-his-bets-on-oil-price.do Hedging by airlines essentially takes one of two forms: contracting to forward-buy kerosene at a pre-determined price for future delivery or taking a financial contract out (that is placing a bet) on the movement in oil prices on a traded exchange. Either way, the outcome, financially, is effectively the same. "
Q Asia readies for new hedge accounting rules Original headline: Brought to account Author: Viren Vaghela Source: Asia Risk | 05 Jul 2011 http://www.risk.net/asia-risk/feature/2083769/asia-readies-hedge-accounting-rules A major change in international accounting rules due to come into force in 2013 looks set to dramatically transform the treatment of derivatives used as hedges for corporate transactions. Dealers are predicting a boom in activity in this area. But corporates in Asia are more cautious. Viren Vaghela reports In late 2010, international accounting standards setters unveiled one of the most significant accounting rule changes in recent years, by promising to align risk management with accounting and facilitate the use of more derivatives for hedging purposes. The move was greeted warmly by the corporates and the derivatives industry in Asia, where some parties believe accounting rules have contained the ability of corporations to hedge their risks. ... Commodity hedges to soar? However, airlines and other heavy users of commodity inputs may well benefit from the new rules. Air carriers, for example, look set to be able to use crude oil to hedge their jet fuel exposures without having to incur wild swings on their profit and loss accounts. The use of crude contracts was previously deemed insufficiently effective to fall under hedge accounting. Jet fuel is a derivate of crude oil, yet price moves between the two products are not perfectly correlated. âIf you are hedging the price fluctuation of jet fuel you can now have a crude oil derivative as the hedging instrument as long as it is highly correlated,â says Yin Toa Lee, partner in financial accounting advisory services at Ernst & Young in Hong Kong. âIn the past hedge accounting was seen as a privilege so they made it restrictive for hedging relationships that were not of the same commodity class, even if they were more economically correlated.â Tina Koutsoukis, treasurer of operations at Australian airline Qantas in Sydney, agrees that the new component hedging rules will now expand the use of derivatives available for hedging in the airline industry. âWe should be able to use Brent crude derivatives to hedge the Brent component of jet fuel oil,â she says. âIAS 39 forced us to correlate movements in all our derivatives, such as crude derivatives and gas oil, against movements in the jet fuel price, which was not always correlated and resulted in P&L volatility coming through.â UQ
Q IASB has change of heart on hedge accounting Author: Duncan Wood Source: Risk magazine | 09 Dec 2010 http://www.risk.net/risk-magazine/news/1931087/iasb-change-heart-hedge-accounting Proposed new rules on hedge accounting - published by the IASB this morning - are intended to make life easier for corporate hedgers ... The classic example is airline hedging of jet fuel, says IASB associate director, Sue Lloyd. An airline might protect itself from volatile jet fuel prices by buying crude oil derivatives, but the value of jet fuel reflects not just crude oil prices but also refining costs. "Usually, you can't be sure those two things are going to stay in the 80-125% band, so airlines typically fail to get hedge accounting. But the exposure draft will allow an airline to say âwell, economically, we're not trying to hedge the whole of the jet fuel price - we're trying to hedge an identifiable component of that price, which is the crude oil element'. Because they're now hedging crude oil with crude oil, they'll get a good match," she says. UQ
Zero-cost Collars? Q http://www.adaderana.lk/opinion.php?nid=2228 Beyond Crude Oil Hedging October 18, 2011 For most Sri Lankans the 3 part article on âCPC Crude Oil Hedgingâ on this column became interesting and important when a British Supreme Court ordered Sri Lankan Government owned Ceylon Petroleum Corporation (CPC) to pay US $ 168 Million plus interest to Standard Chartered Bank to cover the outstanding balances on Crude Oil Hedging contracts. The readers of Ada Derana webpage were well informed of this issue through very detailed articles written by me, and it was raed by many all over the world. This was evident with remarks made by Dr. Harsha De Silva of UNP quoting me, at a Political Debate on âJanahandaâ political program on TNL Television on CPC. Citi Bank and Douche Bank will also seek a Supreme Court judgment in order to recover their respective outstanding amounts in the future. The Hedging was done wrong and this mistake has made a huge loss for CPC and Sri Lanka. Now it is time to see, the possibilities of avoiding payment to these foreign Banks within a legal framework. The CPC was promoted with the idea of hedging much earlier than Mr. Asantha De Mel assumed duties as Chairman. However Mr. De Melâs little knowledge of Spot Foreign Exchange Margin Trading made it easier for him to make decisions on this new project. It was common knowledge that if anything goes wrong by trying to something new at CPC that it would cost the Chairman his seat and when the hedging went bad as expected, it cost Mr. De Mel his position. However most of the decision making on the method of hedging was done by the Central Bank of Sri Lanka (CBSL) and with all due respects our policymakers had no idea how to Hedge Crude Oil. They were text book economists and by the time we executed our Hedge the Crude Oil market had changed substantially. It is important to scrutinize the Cabinet paper which the CBSL forwarded for cabinet approval to execute the Hedge with these banks on behalf of CPC. Further we have to look if this cabinet paper instructed the Banks to hedge at precise price levels and use hedging method of âZero Cost Collarâ. Both CPC and CBSL wanted us to Hedge using the above method but they never instructed us to execute at any specific price. Never the less we refused to execute such a Hedge seeing the danger of the losses this could make in the event of market falling. We represented âRosenthal Collins Group,â which was at that time ranked No 21 among the largest Brokerage companies in the World, through âCytrade Financial LLC, Chicagoâ which was an Introducing Broker (IB). It is one of the most important responsibilities of the Commodity Trading Advisor (CTA) to advice the Client of impending dangers of such a Hedging Method, and the team of CTA s from Cytrade Financial which included me, strongly advised CPC to avoid âZero Cost Collarâ style Hedging and further we refused to do so. Even if we wanted to execute such a deal our Brokerage Firm would not accept it due to the unlimited risk involved in the deal. But these Banks who are in a legal battle to get paid by CPC, carelessly, fraudulently accepted this request by the CBSL and the CPC and executed it outside the jurisdiction of the National Futures Association (NFA) of USA and Financial Services Authority (FSA) of UK. NFA and FSA have very clear guidelines to protect the Client. If we could prove, even with great shame, that when the CBSL gave instructions to execute the Hedge, the CBSL had no idea of the risks involved in such a Hedge, these Banks will have to completely forget about all the claims that they have leveled against Sri Lanka. I hope that Sri Lankan legal team who handles this case would look not only at the defects in the contracts but also at the unethical execution of this Hedge which involves public funds of a small country. The American team of CTA s who were down in Colombo in December 2006 are ready to testify in UK or any other place that, CBSL had no prior experience nor local experts on the industry and one of the main reasons why they entrusted the Banks to execute the Hedge was due to the utmost trust CBSL had on these Banks. I am sure it is only the CPC in the whole world who would have executed such a dangerous and foolish Hedging Contract at that time. It is extremely difficult to believe that these three Banks which has a huge international presence and vast exposure to volatile Commodity markets executed this contract even if it was requested by the CPC, CBSL or by anyone else. There is clear foul play written all over this entire issue. For me being in the industry for a long time, it looks like âThe Banks Knew That the Price of Crude Oil would Fall.â They did not really buy or sell any real contracts but waited until such time Crude Oil prices crash, which was inevitable and let CPC make huge losses. Our loss will be the profit of the Bank. Many people often talk about Bucket Shop operations and they really donât have any idea and this is a classic example for Bucketing. I never knew the exact price levels of the execution and when I was informed by Derana, it was very clear that this Hedge was executed to Loose but not to Profit. Therefore we have to be united as Sri Lankans leaving all partisan rivalries and be supportive to the authorities to fight against these multinational organizations who exploit underdeveloped nations. The mistakes and frauds if any, by Sri Lankans who were involved in CPC Hedging Deal should be investigated. It is impossible for a few Multinational Banks to draw a Country in to a fraudulent contract without help within. Therefore the government should immediately look in to possibilities of some responsible Sri Lankan officials misleading the entire cabinet, influenced by large kick - backs by these Banks. For Sri Lankans the word âHedgingâ is an unpleasant and fearful one. Hedging is not at all a bad instrument especially it is a must for an Agricultural Economy such as Sri Lanka. Unfortunately largest Hedge we ever executed was an expensive disappointing one. We as a nation will have to change our perception of Hedging without further delay. Wild fluctuations in Global Crude Oil prices are here to stay. The Government had taken the blows by subsidizing petroleum products but might not be able to continue forever. Policymakers can neither banish big Oil Price swings nor reasonably hope Sri Lanka would not depend on imported Oil in the foreseeable future. Hedging is something if executed right, could help stabilize the energy market resulting in countryâs economic resilience and minimize the geo-political complications of this new and challenging time. UQ
Weekly live calls: Bought today 2x Feb CL (Exp17Jan) 100.5 Call @$3.78 (Price filled on IB Similation; Recorded as UCO @4.10 on C2: at 1/3/12 12:20 ET).
Closed today 2x Feb CL (Exp17Jan) 100.5 Call @$2.07, for a loss $3,420. Bought today 1x Feb CL (Exp17Jan) 101.5 Call @$1.60.