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Evaluating fuel cost hedging for SKYSS

Stokkeland, Karl Arne; Bjøndal, Kristian Gilje
Master thesis
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URI
http://hdl.handle.net/11250/2611050
Date
2019
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  • Master Thesis [4657]
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.

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