Fuel Hedging and Risk Management: Strategies for Airlines, Shippers and Other Consumers

Praise for Fuel Hedging and Risk Management

"Risk Management is an art, not a science, but it certainly helps to know a lot of science. In this book, the authors provide an excellent overview of both qualitative and quantitative aspects of risk management and how to design and implement effective win–win fuel oil hedging strategies that will achieve the desired objectives under normal and extreme market conditions.

"In addition to discussing key foundational issues, the book also discusses a framework to understand and manage hugely important second–order effects, such as credit risk or margin calls or asset–liability mismatches, which have the potential to turn a good idea into a bad outcome. A must read for anyone in the finance department of a corporate, trade house, or financial firm involved in fuel oil hedging."
Diego Parrilla, former Global Head of Commodity Solutions and Head of Commodities, Bank of America

"This book provides highly useful insights into hedging and risk management methodologies, as well as theory, for the users of energy products. Dafir provides intuition stemming from not just top–tier commodity structuring expertise, but also broader insight from his earlier experience as a credit derivatives and exotics trader."
Mitch Matharu, former Head of Structuring, Merrill Lynch (Asia Pacific)

"An absolute must–read. From the fundamentals of oil markets to the key points in negotiating a credit agreement and minimizing hedging costs, passing by the subtleties of implied volatility surface construction and its implications in derivatives pricing, this book offers you the indispensable practitioner′s toolbox, useful whether you are a novice or a seasoned fuel trader."
Frederic Cogny, Global Head of Commodities Structured Products Trading, Standard Chartered Bank

"In this book, Dafir blends his deep knowledge of the commodity markets and the vagaries of the financial market with his incredible mathematical ability to explore fuel hedging in a manner accessible to Fuel Procurement Departments, CFOs and board members."
Mark Long, former Head and Managing Director of Merrill Lynch Commodities Asia

"This book is a hands–on guide for anyone interested in fuel hedging and risk management, including lawyers involved in the execution of commodities hedging transactions and related ISDA and CSA negotiations."
Justin Boyd, former Head of Financial Markets Legal, Standard Chartered Bank

Preface xiii

Acknowledgments xix

About the Authors xxi

CHAPTER 1 Energy Commodities and Price Formation 1

CHAPTER 2 Major Energy Consumers and the Rationale for Fuel Hedging 23

CHAPTER 3 Developing Fuel Hedging Strategies 55

CHAPTER 4 Shipping and Airlines Basics of Fuel Hedging 77

CHAPTER 5 Advanced Hedging and Forward Curve Dynamics 113

CHAPTER 6 Exotic Hedging and Volatility Dynamics 141

CHAPTER 7 Fuel Hedging and Counterparty Risk 191

CHAPTER 8 Conducting Scenario Analysis 219

CHAPTER 9 Financing and Risk Management: Bundled Solutions 235

CHAPTER 10 Applied Fuel Hedging Case Studies 253

Bibliography 277

Index 281

SIMO MOHAMED DAFIR is a Managing Director at Volguard, a financial consulting firm specializing in Capital Markets, Wealth Management and Derivatives. He has over fourteen years of experience during which he has held senior positions in a number of major international banks in Hong Kong and Singapore. He was the Regional Head of Commodity Structuring at Standard Chartered Bank, Head of Commodity Exotics and Hybrids at Merrill Lynch Asia, and Trader of Credit Derivatives at Credit Suisse. He is also Professor of Global Financial Markets at Sorbonne Assas International Law School and an expert witness for financial markets litigations. Dafir started his career in Aerospace and Telecom at the European Space Agency and Alcatel. He holds an MBA from INSEAD, a Post Graduate Research Degree from the National Polytechnic Institute of Toulouse, an MSc in Automation from ENSEEIHT and a Bachelor′s degree in Mathematics.

VISHNU N. GAJJALA is a commodity derivatives expert at Volguard, where he oversees the financial market analytics business. He has held positions in commodities structuring and sales at institutions including Standard Chartered Bank and Merrill Lynch, where he developed customized strategies for commodity hedgers and investors, including airlines, mining companies, trading houses, private banks and sovereign wealth funds. He holds a Bachelor′s degree in Electrical Engineering from IIT Madras and an MBA from IIM Bangalore. Vishnu currently resides in Singapore.