Icelandair has entered a call spread to hedge until June against the price of gas oil rising. Sveinbjorn Indridason, director of treasury in Reykjavik, said the airline bought an over-the-counter call option struck at USD220 and sold a call at USD240. Both options were for 6,000 tons of gas oil. The net premium on the trade was approximately USD6 per ton. Gas oil was trading at USD210 when it entered the trade.
The airlines entered the call spread as part of its regular hedging program. Indridason expects the airline to use 41,000 tons of jet fuel in the quarter, approximately 60% of which is hedged using derivatives. The call spread was preferable to buying a call outright because it was cheaper. Indridason said it often uses collars but in this case wanted to allow more upside potential in case the price of gas falls.
Although Icelandair has exposure to jet fuel, it decided to deal with gas oil options because the two underlyings are strongly correlated, said Indridason. Furthermore, options for gas oil are cheaper because it is a more liquid market. He estimated 60% of the company's fuel hedge is in gas oil.
The airlines traded the options with Bank of America because it offered the best price for the trade, Indridason noted.
