International Financial Management

Question 1

How can we hedge against jet fuel price increases while operating in South Africa?

Answer 1

• Foreign currency option contracts with banks, where you can limit the maximum price that you you pay them
• you can reduce reduce the hedging costs of this option contract with a collar but you’ll have to Google how it works
• you can purchase a forward currency contract so that you can be protected against unexpected strsngthing of the value of the foreign currency
• You can entry into supply contracts to lock prices in place which will help keep you safe for the next 3-12 months
• You could purchase oil futures which means thr buyer will buy the underlying asset(jet fuel) at an agreed price determined today
• You van make use of natural hedges where you sale things to foreigners in their own country snd then keep the revenue in a foreign account so that it remains in that currency and and pay thr foreign expenses with that money
• You could simply just bulk purchase jet fuel when the prices are favorable
• You could make use of swaps, which is when the prices are fixed on the date of agreement but any changes in the spot rate would still apply