Fuel price risk management is a continual cyclic process that includes risk assessment, risk decision making, and the implementation of risk controls. Fuel price risk management focuses primarily on when and how an organization can best hedge against costly exposures to fuel price risk.
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Establishing the context
- current and future business environment
- financial position and budgets
- objectives and needs
- required fuel consumption, etc.
- fuel cost calculations
- risk identification
- the organization’s attitude to risk
- exposure analysis to fuel price fluctuations
- scenarios of various hedging strategies
- implementation of a fuel price risk strategy
Fuel Hedging is a contractural tool some large fuel consuming companies, such as fuel oil retailers, gasoline jobbers, and airlines use to reduce their exposure to volatile and potentially rising fuel costs. A fuel hedge contract allows a large fuel consuming company to establish a fixed or capped cost, via a commodity swap or option. Large fuel consuming companies enter into hedging contracts to mitigate their exposure to future fuel prices that may be higher than current prices and/or to establish a known fuel cost for budgeting purposes. If a large fuel consuming company buys a fuel swap and the price of fuel declines, the company will effectively be forced to pay an above-market rate for fuel. If a large fuel consuming company buys a fuel call option and the price of fuel increases, the company will receive a return on the option that offsets their actual cost of fuel. If a large fuel consuming company buys a fuel call option, which requires an upfront premium cost, much like insurance, and the price of fuel decreases, the company will not receive a return on the option but they will benefit from buying fuel at the then lower cost.