ABSTRACT
In the United States, there are two methods in how the values of an airline's fuel hedges are represented in the financial statements: with hedge accounting or without hedge accounting. The major problem concerning fuel for airlines is that, unlike some other costs, jet fuel prices are largely out of an airline's control. This chapter focuses on jet fuel hedging, currency hedging is also extensively practiced in the aviation industry whereas jet fuel is not a highly liquid commodity, and currencies are. The key difference in accounting practices concerning hedge accounting is the recognition of gains and losses on the fuel derivative contracts. Hedging is a technique used to minimize risk by offsetting one's exposure to fluctuations in prices. For instance, an airline can lock in costs by buying crude oil futures at a pre determined price. Fuel and currency hedging are types of financial options and, in order to understand them, we must first understand options.
