Author Topic: Hedging - Oil Prices and other Commodities  (Read 5243 times)

Offline q

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Hedging - Oil Prices and other Commodities
« 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?

 

Offline chin

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Re: Hedging - Oil Prices and other Commodities
« Reply #1 on: 08 September 2009, 23:50:23 »
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?

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...