| Summary: | Abstract
Over the past ten years, the increasing price of jet fuel is putting constant pressure on
the airline industry. Since the jet fuel cost is the second largest operating expenditure
in the airlines sector, even a small increase in the fuel price would lead a significant of
expenditure on the operating cost. This paper tends to exam the use of financial
derivatives to hedge against the adverse oil price change and it effectiveness. To
further illustrate this point, a case study of BA will be used and help to explain how
hedge works so that makes BA better off. In addition, it also highlights the incentives
behind the use of financial derivatives for risk management strategy by companies.
Furthermore, the comparative advantage of hedging strategy among other methods is
also discussed. Our research indicates that, by implementing financial derivatives, the
company's cash flow would be much more stable compare with leaving oil price
unhedged. Finally, this study provides the area for further research, which focuses on
the comparison of financial derivatives with other risk management strategy such as
insurance.
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