 Re: Hedging
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Airlines basically buy fuel contracts on the futures market expecting prices to rise later on. This way, they lock in prices at the time of purchase. Now, if prices go down (yeah, right), then the airlines get burned. What I want to know is, what's in it for the people that SELL the contracts.
[/ QUOTE ]It's not just betting on whether fuel costs will go up or down; if everyone agrees that fuel costs will go up, there still is uncertainty over how much fuel costs might go up. And businesses like Southwest aren't hedging solely to keep costs down (although that's obviously a goal) but also to ensure a constant supply at a known price so that they can budget for fuel costs, which businesses which don't hedge can't do.
Basically, hedging is gambling on the future. You don't want to get into it unless you (a) know what the heck you're doing and (b) have a lot of money to lose. Because hedging tends to be so highly leveraged, you can lose a lot of money very quickly if you bet wrong.
MF
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