Guidebook for Evaluating Fuel Purchasing Strategies for Public Transit Agencies (2012) / Chapter Skim
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Pages 39-46
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From page 39... ...
39 Hedging Level, Duration, and Timing 6.1 Hedge Level Determining the level of coverage is an important component of a hedging strategy. The level of hedging coverage is typically expressed as a percentage of total fuel consumption and ranges from 0% (no coverage)
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From page 40... ...
40 Guidebook for evaluating Fuel Purchasing Strategies for Public transit Agencies 6.2 Hedge Duration The hedging duration is the length of time that the transit agency is protected from fuel price increases and is expressed in months of forward fuel consumption. Often, a transit agency will choose to align its hedge duration with the agency's budget term (the period of time over which the agency's budget is set and fixed)
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Hedging Level, Duration, and timing 41 against overhedging in the event that the transit agency makes downward adjustments in its fuel consumption between budget periods (due to the cancellation of bus routes, for instance)
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From page 42... ...
42 Guidebook for evaluating Fuel Purchasing Strategies for Public transit Agencies protection of 50% from 18 to 24 months. A tapered approach allows for low prices to be lockedin further into the future when desirable, but avoids the risk of overhedging in the event that fuel consumption is reduced.
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Hedging Level, Duration, and timing 43 intervals from 2005 through 2010. The futures curves are indicated by the thin lines extending from the spot price series.
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From page 44... ...
44 Guidebook for evaluating Fuel Purchasing Strategies for Public transit Agencies 6.3.2 Managed Timing Strategy A managed strategy -- sometimes known as a dynamic, situational strategy -- is a timing strategy that seeks to reduce the average fuel price by adjusting elements of the hedging strategy (instrument, level, duration, etc.) in response to changes in the market environment and price outlook.
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From page 45... ...
Hedging Level, Duration, and timing 45 Source: SAIC, NYMEX 1.00 1.50 2.00 2.50 3.00 3.50 4.00 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 $ p er ga llo n Hedge Average Price (Variance = 17%) Spot Price (Variance = 28%)
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From page 46... ...
46 Guidebook for evaluating Fuel Purchasing Strategies for Public transit Agencies Figure 6.5 shows that this strategy does not lock-in a fixed price level for the long term as with single-point hedging decisions. Overall, between June 2006 and December 2010, the hedged and spot price series have roughly the same mean at $2.15 per gallon.
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