[LuganoPirate]

I can’t say which airline, but been chatting to sometime who works for a major airline responsible for fuel purchases and hedging. A few months ago they started buying puts which multiplied several times as the price fell offsetting some of the losses on their hedges.

[openfly]

@LP….did you have too much orange juice at the Nellie breakfast??!!

What do you mean by “buying puts which multiplied several times…..” ..??

Another glorious day here…

[BigDog.]

Hi Openly, Puts (and Calls) are (usually off balance sheet) financial instruments – derivatives. A put option gives you the right to Sell at an agreed price anytime by a specified later date a commodity eg fuel or instrument eg rate. If the market price (in this case say fuel) goes up then you would not exercise your option as you can get a better price on the spot market. If the current market price is lower then it is best to exercise your put option as you would get a better price.

So by buying a put, you are buying a right to sell at an agreed price, by an agreed future date. As you are merely buying or selling the right as opposed to the underlying instrument/product itself, then your funds can be leveraged many times.

If the price/value of the underlying instrument starts to fall off a cliff eg $50, whilst the put you purchased gives you the right to sell at say x amount at $80 a unit, then you would have made an excellent return.

If the value had gone up to say $95 then you would let your put option lapse and the only money you have lost would be the cost of buying the option – not the underlying fuel. They allow people to speculate big time on the value of any commodity/currency/rate without having to own or intend to own said commodity/currency/rate.

[openfly]

Thanks BigDog for the info. That “Puts” me in my place….Ba, Boom!!

[LuganoPirate]

Thanks for the explanation BigDog, I should have said the price multiplied several times! Perhaps the fizz in the OJ is not sparkling water Openfly. That would explain a lot!

I was at the L’Omarins horse race yesterday so catching up now. We dropped off a friend at your hotel on the way back and I used the UBER ago for the first time, it’s quite incredible.

[SimonS1]

So over a month on from the OP and no sign at all of the “action” that the government was talking about.

Presumably we need to wait for the election to draw closer for more of the populist talk.

[LuganoPirate]

Surely with the fall in petrol prices, we should also see bus and taxi fares get cheaper? Or is the local cab company also hedged with $100 oil?

[AMcWhirter]

According to Reuters, LH will see its fuel bill fall by 13 per cent in 2015.

It is estimating a fuel bill in 2015 of Euros 5.8 billion compared to Euros 6.7 billion in 2014.

http://www.reuters.com/article/2015/01/12/us-lufthansa-oil-idUSKBN0KL11020150112

[LuganoPirate]

Well written article in the Guardian online:

http://www.theguardian.com/business/2015/jan/13/why-air-passengers-shouldnt-bank-cheaper-fares-drop-price-oil

[Author]

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