UM Economics Hedging Decision for South West Airline Essay


Write about a 3 page 12pt, double spaced essay on what is asked on the PDF. I will provide you with the articles we were given to understand Southwest’s and Delta’s jet fuel risk exposure, as well as the main article you need to compare it to. As stated in the question, you have to choose one of the three choices on what to write the paper on: Southwest, Delta or the role of risk management. You must have some prior knowledge of corporate finance to answer this.

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Economics 373
24 March 2021
One of the hottest topics in all of finance is risk management. But what does that mean,
exactly, in the context of corporate finance? Froot, Sharfstein and Stein spell out what they think
is the role and purpose of risk management for the corporation in their classic article, “A
Framework for Risk Management.” In this article, they spell out what they see as the general
role of risk management as well as conditions that govern whether a firm should hedge a
particular risk.
One example of a risk that is often hedged is the fuel costs of airlines. Read the articles
about airlines’ hedging of their jet fuel costs and reflect on this practice of hedging (or not
hedging) in the context of the Froot et al article.
Write a paper that describes when companies should hedge a particular risk, according to
Froot, Sharfstein and Stein. In particular, see whether you can figure out what the statistical rule
(of thumb) is that is lurking in their analysis. Aim the paper at arguing whether Southwest did
(does) the right thing by hedging its jet fuel risk exposure, according to their framework.
Alternatively, you could consider what Delta did and argue whether their actions were
appropriate according to the Froot et al framework.
If you like, you can use your paper as a platform to argue against the role of risk
management as spelled out in “A Framework for Risk Management.”
Note: there are some really stupid quotes in a couple of the WSJ articles regarding expost hedging. Quite simply speaking, you can’t hedge an exposure after the fact.

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Explanation & Answer:
3 pages

risk management

Risk assesment

Hedging Decision for SouthWest Airline

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