An Optimal Solution to a General Dynamic Jet Fuel Hedging Problem
نویسندگان
چکیده
We propose a dynamic hedging strategy for jet fuel which strikes a balance between hedging against jumps in the price of jet fuel and placing bets that the price will rise, lowering the overall cost of jet fuel. We model the commodity price using an unobservable two-factor model that allows mean-reversion in short-term prices and uncertainty in the equilibrium level to which prices revert. We combine dynamic programming and Kalman filter estimation to obtain an optimal policy that minimizes the expected costs while keeping the variance at low levels.
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