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This paper investigates the cross hedging performance of several oil forwards contracts using WTI, Brent, gasoil and heating oil to manage jet-fuel spot price exposure. We apply three econometric techniques that have been widely tested and applied in the cross hedging literature on foreign exchange and stock index futures markets. Using quotes from the financial industry on forward contracts, we can show that the optimal cross hedging instrument depends on the maturity of the instrument's forwards contract. The results highlight that the standard approach in the literature to use crude oil as a cross hedge is not optimal for time horizons of three months or less. By contrast, for short hedging horizons our results indicate that gasoil forwards contracts represent the highest cross hedging efficiency for jet-fuel spot price exposure, while for maturities of more than three months, the predominance of gasoil diminishes in comparison to WTI and Brent.

Non-financial companies typically face a multitude of risks potentially leading to significant fluctuations in the firm’s cash-flows. This paper presents a case study approach demonstrating the hedging strategy employed by an international air carrier managing its jet-fuel price exposure. We contribute to the academic discussion on an optimal mix of linear and nonlinear hedging instruments by providing an in-depth analysis of the firm’s hedging policy and its derivative usage. Using the carrier’s self-defined implicit objective function based on annual granularity, we show that the air carrier could fine-tune its current hedging portfolio by adding tailored exotic options. Specifically, we develop an annual average-price option and incorporate this derivative into the company’s hedging portfolio, leading to a superior position in terms of hedging cost and the firm’s overall gross exposure to jet-fuel price fluctuations.