Business Case Studies & Business Publications

Central Express Trucking

Lipson, Marc L., M...

Case

Central Express Trucking

Lipson, Marc L.; Munoz, Steve

F-1768 | Published March 14, 2017 | 11 Pages Case

Collection: Darden School of Business

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The CEO of Central Express Trucking (CXT) is considering a novel change to its shipping contracts. Given the high degree of variation in fuel prices, most contracts have fuel surcharge agreements that pass along a significant portion of fuel price risk to the shipper. CXT is considering whether to offer a contract without a surcharge agreement and use fuel contracts to hedge the risk itself. This might be attractive to some smaller customers and allow CXT more latitude in how it manages the fuel price risk. This case has been used in the core finance curriculum at the University of Virginia Darden School of Business to introduce commodity risk management in a business setting. It can also be used in classes on advanced financial contracting, derivatives, or risk management. The case has also been used quite effectively in executive education programs.

The case can be used to pursue the following major objectives: (1) to introduce commodity risk in a business setting; (2) to illustrate a number of ways contracts can be used to mitigate risk—in particular, through option-like features such as, in this case, a swap, cap, or collar; (3) to explore how option-like contracts are priced and traded in markets and how, given that contracts are fairly priced in markets, those contracts might be of value to enterprises; and (4) to explore a secondary set of issues related to the nature of risk drivers and the limits of contracting solutions.