The idea behind cointegration, a concept introduced by Granger (1981) and formalized by Engle and Granger (1987), is to find a linear combination between non-stationary time series that result in a stationary time series. It is hence possible to detect stable long-run relationships between non-stationary time series (for example, prices).
Cross hedging jet fuel
Airlines are natural buyers of jet fuel. Since the price of jet fuel can be very volatile, most airlines hedge at least part of their exposure to jet fuel price changes. In the absence of liquid jet fuel OTC instruments, airlines use related exchange traded futures contracts (for example, heating oil) for hedging purposes. In the following section, we derive the optimal hedge ...