Commodity price hedging is a popular trading strategy frequently used by oil and gas producers as well as heavy consumers of energy commodities such as airlines to protect themselves against market fluctuations. During times of falling crude prices, oil producers normally use a short hedge to lock in oil prices if they believe prices are likely to go even lower in the future, while heavy consumers like airlines do the exact opposite: Hedge against rising oil prices which could quickly eat into their profits.
However, hedging is far from a silver bullet that is guaranteed to protect anybody from volatile markets, something that many airlines are now feeling keenly.
Many large carriers use hedges to lock in years of fuel costs in a bid to smooth out turbulence in highly volatile energy markets. But in this era of persistently low oil prices, this time-tested insurance is…
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