The Relationship Between Use of Financial Derivatives and Fuel Costs in Kenya Airways
Abstract
Oil has been used for many years as the main source of energy and its demand has made
it to be one of the most sought after commodity globally. Its impact on national
economies and institutions is enormous. The study used several theories in its study in
order to bring out the issue of fuel pricing in the world economy. Various determinants of
fuel costs were also analyzed by various institutions and scholars, bringing out the issue
of price fluctuation and hedging. The objective of the study was to determine the
relationship between use of financial derivatives and fuel costs in Kenya. With these
objectives, empirical studies on relationship between use of financial derivatives and fuel
costs, both local and international were done which assisted in the formulation of data
analysis model. The research design was based on a longitudinal study, which looked at
the unit of analysis (Kenya Airways) for three years, gathering information relevant to the
study in order to come up with a proper analysis. After data collection and cleaning,
analysis was done through regression analysis, Pearson’s correlation test, and Chi-square
test using Statistical Package of Social Sciences (SPSS). The results of the study showed
that financial derivatives do not have a relationship with fuel costs in Kenya Airways.
The regression test showed that the financial derivative had an R value of 0.017 which
indicated that financial derivative is not a good predictor of fuel cost at Kenya Airways.
Correlation tests performed also indicated that there was no correlation (r=-0.017)
between financial derivatives and fuel costs in Kenya Airways. However, Chi-square
tests indicated that financial derivatives are effective means of fuel cost management in
the airline. The study recommended the establishment of a fuel derivatives market in the
country so that people can be able to transact the derivatives. This will help monitor the
prices from a central point, and also can help in the predictability of the fuel prices as
earlier studies have pointed out. The study had the limitation of absence of centralized
data for the airline and a derivatives exchange in the country. With that, the study had to
look at the contract prices of Kenya Airways and the banks. These prices may not truly
reflect the nature of derivatives as different companies would have different contract
prices which are confidential to them.
Citation
Ndosi,John M.;October,2013.The Relationship Between Use Of Financial Derivatives And Fuel Costs In Kenya Airways.Publisher
University of Nairobi College of Humanities and Social Sciences