Fuel cost is the most significant cost for fuel-consuming industry, for instance, airlines and ocean shipping companies. However, the world oil price is highly volatile, which motivates the shipping industry to consider fuel hedging derivatives to reduce their fuel price exposure. We simplify the fuel hedging derivatives to be just getting a fixed oil price, and based on this we build models for single firm and multiple firms respectively to study about the firms’ hedging decision: the single-firm models mainly focus on each single firm’s decision since the shipping industry is homogeneous, while the multiple-firm models consider more about competition. In our most important two-stage models (for both single firm and multiple firms), we joint the production decision and the fina...[ Read more ]

Fuel cost is the most significant cost for fuel-consuming industry, for instance, airlines and ocean shipping companies. However, the world oil price is highly volatile, which motivates the shipping industry to consider fuel hedging derivatives to reduce their fuel price exposure. We simplify the fuel hedging derivatives to be just getting a fixed oil price, and based on this we build models for single firm and multiple firms respectively to study about the firms’ hedging decision: the single-firm models mainly focus on each single firm’s decision since the shipping industry is homogeneous, while the multiple-firm models consider more about competition. In our most important two-stage models (for both single firm and multiple firms), we joint the production decision and the financial decision—fuel hedging. The firms decide their hedging proportion in the first stage, i.e., part of their fuel will be bought at a hedged price and others from spot oil market at an uncertain future price. The production decision will be made in the second stage with both oil price and hedging decision realized. By using the backward approach, we solve the optimization problems for both stages and find that fuel hedging intensifies market competition when fuel price rises up, thus the Nash Equilibrium shows not all the firms will hedge their fuel cost even though they expect the future fuel price to increase, which is against our intuition.