1. Forward Contracts:
Air Mauritius enters into forward contracts with fuel suppliers to lock in fuel prices at a predetermined rate for a specified future delivery date. These contracts provide a degree of price certainty and enable the airline to budget its fuel expenses more accurately.
2. Futures Contracts:
Futures contracts are standardized contracts traded on exchanges, allowing Air Mauritius to buy (long position) or sell (short position) jet fuel at a predetermined price for delivery on a specific future date. By carefully managing its futures positions, the airline can hedge against potential price increases.
3. Options Contracts:
Options provide Air Mauritius with the right, but not the obligation, to buy (call option) or sell (put option) jet fuel at a set strike price within a specific time frame. These contracts give the airline the flexibility to take advantage of favorable price movements while limiting the potential losses if prices move in an unfavorable direction.
4. Swaps:
Swaps involve exchanging one type of cash flow for another. Air Mauritius may enter into fuel swap agreements with other airlines or financial institutions to exchange future cash flows based on different price indices, such as the Singapore Jet Kerosene (SJK) Index. This can enable the airline to optimize its fuel costs and reduce exposure to price fluctuations.
5. Hedging Combinations:
To enhance risk management effectiveness, Air Mauritius often employs a combination of hedging strategies. For instance, the airline may combine forward and futures contracts or options and swaps to achieve a customized hedging portfolio that suits its specific risk tolerance and fuel consumption needs.
6. Dynamic Hedging:
Air Mauritius continuously monitors market conditions and adjusts its hedging strategy accordingly. This dynamic approach allows the airline to respond to changing fuel price patterns, market volatility, and its future flight schedule.
By carefully selecting and implementing appropriate fuel hedging strategies, Air Mauritius aims to mitigate the adverse impact of fuel price volatility on its financial performance, maintain operational efficiency, and protect its profitability in the face of uncertain fuel market conditions.
