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    #1

    Hedging oil prices

    Would you please tell me what the "hedging oil prices" means in the following news report:

    "Airlines around the world have suffered heavy losses from hedging oil prices, which reached record levels last year. They peaked at US$147.27 a barrel in July, but have since plummeted by more than 72 per cent."

    Thank you very much.

  1. Monticello's Avatar
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    #2

    Re: Hedging oil prices

    Quote Originally Posted by Deepurple View Post
    Would you please tell me what the "hedging oil prices" means in the following news report:

    "Airlines around the world have suffered heavy losses from hedging oil prices, which reached record levels last year. They peaked at US$147.27 a barrel in July, but have since plummeted by more than 72 per cent."

    Thank you very much.
    Hi Deepurple,

    "Hedging oil prices" here means that, anticipating that the price of oil would continue to climb, the airlines bought contracts for delivery of fuel that still reflect the high prices from last summer. Now, even though the price of oil on the world market has dropped 72%, they are still commited to these "hedged" contracts and thus are suffering exorbitant losses.

    A quote from a Business Week article from spring '08 explains this:
    A hedge is a financial instrument that allows investors to lock in certain prices to act as insurance against the possibility that the open-market, or spot, price of that commodity will rise. If the price then rises, the company gets a financial payoff that cushions the blow of higher prices. In this way, investors can actually make money using hedging as insurance, giving them an advantage over competitors in the marketplace.
    You may read the entire article at:

    http://www.businessweek.com/bwdaily/dnflash/content/may2008/db2008056_075377.htm
    Last edited by Monticello; 23-Feb-2009 at 05:12.

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