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Hedging - Oil Prices and other Commodities

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q:
A while ago when CX announced it's annual profit and recorded a large loss with fuel hedging
being a big contributor.  I wondered why CX entered into a contract that only protected them
from fuel price movements on the upside.  

Then this week I read a further article in the "Economist" which said that some China SOEs were
considering not honoring some futures contracts.  The article also mentioned that a branch of
the Central Government was investigating some of the contracts to establish whether they were
for hedging or speculation.

My question is: If a company buys a contract that protects them from price movements in only one
direction, are they engaging in speculation?

I think they are, but why?

 

chin:

--- Quote from: q on 08 September 2009, 09:28:00 ---A while ago when CX announced it's annual profit and recorded a large loss with fuel hedging
being a big contributor.  I wondered why CX entered into a contract that only protected them
from fuel price movements on the upside.  

Then this week I read a further article in the "Economist" which said that some China SOEs were
considering not honoring some futures contracts.  The article also mentioned that a branch of
the Central Government was investigating some of the contracts to establish whether they were
for hedging or speculation.

My question is: If a company buys a contract that protects them from price movements in only one
direction, are they engaging in speculation?

I think they are, but why?
--- End quote ---

If they are end user of the commodity like oil, they are naturally betting on the other side already. So buying protection for price increase is a hedge.

But if they are getting anything more complicated then a simple call, then perhaps they are trying to speculate...

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