Airlines typically enter into jet-fuel commodity swap contracts. In a swap the airline pays (or receives) a fixed price for fuel and receives (or pays) the floating market index, thereby locking-in—or “fixing”—its fuel cost for a defined period. Swaps are therefore the specific derivative instrument used; “hedging” is the overall risk-management strategy, not the contract itself.

A. commodity – Describes the underlying good (fuel) rather than the financial contract.

C. exchange – A trading venue or mechanism, not an instrument that fixes price.

D. hedge – Refers to the strategy or position; it is not the specific contract that delivers the fixed price.

1. Hull

J. C. Options

Futures and Other Derivatives

10th ed.

Pearson

2018

Chapter 7 “Swaps

” pp. 146–148 – explains commodity swaps used to lock in jet-fuel prices.

2. Carter

D.; Rogers

D.; Simkins

B. “Does Fuel Hedging Make Economic Sense? The Case of the U.S. Airline Industry.” Financial Management

2006

35(1)

pp. 53–55. DOI:10.1111/j.1755-053X.2006.tb00147.x – documents airlines’ use of fuel swap contracts to fix future costs.

3. MIT OpenCourseWare

15.437 Options and Futures Markets

Lecture 12 slides “Commodity Swaps

” slide 9 – gives example of airlines employing jet-fuel swaps to lock in prices.