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Financial Engineering Assignment PDF

   

Added on  2021-04-24

14 Pages3599 Words133 Views
Running head: FINANCIAL ENGINEERINGFinancial EngineeringName of the Student:Name of the University:Authors Note:

FINANCIAL ENGINEERING1Table of ContentsIntroduction:...............................................................................................................................2Literature review: (Stating the derivatives used by airline companies and jet fuel traders forhedging the fuel price)...............................................................................................................2Evaluating the strategies used by Delta and China Aviation oil corporation limited, whileidentifying the problems and actions which turned against them:.............................................5Identifying whether no hedge is better than hedge:...................................................................7Depicting the control mechanisms that companies can use to protect them against wrong useof derivatives transactions:.........................................................................................................8Conclusion:................................................................................................................................9Reference and Bibliography:....................................................................................................11

FINANCIAL ENGINEERING2Introduction:The report focuses on delivering the current position of the derivatives market, whichis being traded all around the world. In addition, the report also depicts financial instruments,which is been used in the current market for hedging and speculative trades. Furthermore, thederivatives market consists of different types of contracts such as future contract, forwardcontract, swaps, and options. The combination of the trades conducted by investors andcompanies to hedge their current position in the market and reduce the negative impact ofvolatile capital market. In addition, the contract of crude oil is evaluated in the section, whichcould allow investors to adequately hedge their exposure of commodity market. Moreover,the relevant needs for hedging instrument for fuel and airline industries are adequatelyevaluated. Moreover, with the help of forward contracts fuel and airline industry can fix therising prices of crude oil and reduce their exposure from the volatile commodity market.The role of hedging is immense in the fuel & airline industry, as it helps in curbingthe high risk involved in crude oil trade. The changing price of crude oil is the mainly factorfor fuel & airline industry, which helps them change their current project and view pointregarding their organisational strategy. Declining fuel price would help airline industry, whilehampers the actual profitability of fuel industry (Hull and Basu 2016.). Hence, derivativesmarket and hedging process is essential for fuel & airline industry, as it helps them to reducethe negative impact from volatility commodity market.Literature review: (Stating the derivatives used by airline companies and jet fueltraders for hedging the fuel price)There are four different types of derivative instruments, which is currently being usedby Jet fuel trader’s and airline companies. The hedging instruments such as future contract,

FINANCIAL ENGINEERING3forward contract, swaps, and options are ad3ually being used by companies all around theworld. However, the following instruments are used by the current companies falling underJet fuel and Airline.Purchase of Swap Contracts:The Jet fuel and Airline companies are current focused in using swap contracts forhedging their current position in the market and reducing the negative impact from volatilecommodity market. The purchase of swap contacts is conducted for reducing the fuel cost,while the contract has stringent guidelines incorporated within its workings. Furthermore, theswap strategy is as the call option where the individual does not conduct relevant delivery ofthe stock or commodity. In addition, the swap contracts do not oblige the oil companies topurchase the end commodity at the completion or expirer of the contract. Instead they providecompany with adequate leverage and position for the period, which could help them hedgetheir currency exposure in the commodity market (Chance and Brooks 2015).Call option purchasing:Purchasing of call option can also be conducted by Jet fuel and Airline companies foraddressing the risk, which is persistent in the commodity market. In addition, the buying ofcall option mainly allows the Jet fuel traders and Airline companies to fix a certain price atwhich the stock can be sold in future date. This measure mainly helps in reducing thenegative impact of volatile capital market, while conducting effective trades to reduce theirexpenses on crude oil purchase. However, the call option is beneficial for the Jet fuel tradersand Airline companies for reducing the excessive increment in losses due to the risingvolatility in crude oil market. Strong and Jeyasreedharan (2017) mentioned that with the useof call option companies can hedge their current exposure and minimise the risk that might beportrayed from external factors.

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