Business Case Studies & Business Publications

J&L Railroad

Eades, Kenneth M.,...

Case

J&L Railroad

Eades, Kenneth M.; Lehman, Jeannine; Green, Rick

F-1053 | Published June 23, 1994 | 13 pages Case

Collection: Darden School of Business

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Because of the regulatory environment in the railroad industry, J&L Railroad's profitability is dependent upon the price of diesel fuel. In this case, the student must decide how much of next year's expected fuel demand should be hedged and how it should be hedged. Hedging alternatives include exchange-traded futures and options as well as commodity swaps, and collars offered by the risk management group of a bank. The recommendations of the CFO are laid out in UVA-F-1605.

Students should learn to understand risk management principles and how to hedge exposures using futures and option contracts. The bank risk management products are based on the average price of fuel oil but otherwise parallel the exchange traded instruments.