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), was preoccupied as he drove to work one morning in late October 2013. Diesel fuel prices had been a constant concern at the trucking company he had started 22 years ago. Over the last decade, the steady rise in fuel prices had squeezed margins and dampened profits. Yet despite the existence of fuel surcharges in all of CXT’s contracts, short-term fuel price fluctuations still drove fluctuations in profitability. On his mind that morning was a proposal from the newest member of his sales team to offer a contract to a customer (shipper) that did not include a fuel surcharge.

(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, contracts with 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. (4) To explore a secondary set of issues related to the nature of risk drivers and the limits of contracting solutions. This can include a modest exploration of basis risk.