Evaluating fuel cost hedging for SKYSS

Abstract

The focus of this thesis is to analyse if Skyss, a Norwegian public transport company, can improve its budget certainty through hedging its diesel fuel cost. The hedging strategies is compared to the current contract situation of the company. Currently, Skyss enter contracts with operators, and the compensation payed is determined by the development of an index. The percentage change in the index, from one period to the next, decides the amount of compensation payed between the parties. Our challenge is to find a financial instrument that correlates with this index in such a way that we can create offsetting cash flows, hence improve budget certainty for Skyss. Ideally, when the index increases, and Skyss has an increased compensation to the operator, the financial instrument would profit the same absolute amount. The financial instruments used in the analysis is futures and swaps. For the futures hedging strategy we have used two different contracts; Low Sulphur Gasoil Futures (QS) and Bloomberg Prices for ULSD 10ppm CIF NWE Futures (FLSOM). For the swap agreement, we have used ULSD 10ppm CIF NWE Cargoes NWE (Platts) as the underlying floating hedging product, and Low Sulphur Gasoil Futures (QS) to determine the fixed price. We have used historical data to create a synthetical hedging strategy, and have divided this data into multiple sub-samples to test and compare results for different time periods. Our findings are that three out of four futures contract, and half of the swap-agreements, improves the financial results for Skyss. However, both hedging strategies increase the standard deviation in payments, which is not ideal from a budget certainty perspective. We find that Skyss’ current contract situation alone gives higher predictability over future diesel fuel costs, and do not recommend Skyss to enter a diesel fuel hedging program.