Hedging jet fuel with crude, what risk is left?
Asked at DRW
An airline will buy a large quantity of jet fuel next quarter and wants to lock in the cost. There is no liquid jet-fuel futures contract, but crude oil futures trade deeply. The airline buys crude futures against its future fuel purchase.
Has it eliminated its price risk? If not, what risk remains, and how should it choose the hedge size?
Show a hint
Write the hedged position's profit and loss. Jet fuel and crude move together, but not identically.
Your answer
This one is open-ended. Work it through, then check your reasoning against the full solution.