I heard about hedging in one of my classes and it did not really interest me in the beginning. But skimming through an article on Reuters brought the attention back to the topic. The current scenario of COVID has been a nightmare for airline industry when people are scared to travel in close proximity and closed spaces. I wondered airlines would have been regretting having hedged fuel prices i.e. paying fixed price for the fuel that was set before the pandemic. This fixed price would certainly be higher than the current price levels of the fuel. I imagined this would be the end of hedging.
To my surprise, this hasn't deterred the faith of industry in hedging and the airlines are in fact strategizing for what's ahead. So I decided to understand the rationale behind this motivation.
I took a dataset on the jet fuel prices for the last 2 decades and analyzed how hedging could have helped save or resulted in companies paying more than the market value. And as I continued my analysis, I realized hedging is not a tool to make profits. It is a risk-aversion tool and infuses certainty in the system.
Dataset link: https://www.indexmundi.com/commodities/?commodity=jet-fuel&months=240
Introduction to hedging: https://www.investopedia.com/articles/optioninvestor/07/hedging-intro.asp
Files/folders in the repository: fuel-data.csv: The Dataset whatTheHedge.Rmd: The R-markdown file containing the source code README.md: Information on the project Figs folder: Contains images of the outputs, can be skimmed through to get a quick hang of the project whatTheHedge.html: An webapage of the output with some textual insights