DISCUSSION BOARD 4

READ AND REPLY WITH 400 WORDS WITH TWO REFERENCES INCLUDING BIBLICAL REFERENCE

The Pros and Cons of Hedging Airline Fuel Costs

Top of Form

Hedging is a popular financial tool that is utilized by many financial professionals as well as those in other industries. Hedging is defined by Investopedia as “an investment to reduce the risk of adverse price movements of an asset” (Reiff, 2020). The commercial airline companies utilize hedging in the area of fuel costs to avoid negative economic impacts to their operations. It is well known that fuel prices are inherently volatile, so for industries like that of commercial airlines which rely heavily on the commodity and its pricing for their bottom lines, hedging is often a smart investment. Airline companies utilize several different financial tools to hedge fuel costs such as options and forward contracts. Not only do these investments protect against rising fuel costs, but they also make the airline companies more attractive to institutional investors because in theory these airlines that utilize hedging will provide more stable returns in the long run (Brealey, Myers, Allen, 2020).

While this concept of hedging seems responsible in theory, in practice it is not always the case. These hedging actions cost money, and when fuel costs decrease, the hedging actions are not exercised and therefore money can be lost. This is very apparent in the current situation where due to COVID-19, oil costs around the world are decreasing dramatically. Therefore, airline companies are losing significant amounts of money on their hedged investments. Air France is an example of the negative affects of plummeting fuel costs as they are facing nearly $1 billion in losses for 2020 as a result of their fuel hedging investments (Horton, 2020).

In conclusion, hedging of jet fuel in the airline industry may appear to be a responsible action on paper, however, airline executives must be aware of market trends and the risks associated with those hedging actions before executing.

Biblical Application

James 4:14-15 (NIV) says, “14 Why, you do not even know what will happen tomorrow. What is your life? You are a mist that appears for a little while and then vanishes. 15 Instead, you ought to say, “If it is the Lord’s will, we will live and do this or that.” 16 As it is, you boast in your arrogant schemes. All such boasting is evil. 17 If anyone, then, knows the good they ought to do and doesn’t do it, it is sin for them.” This passage is relevant to the topic of hedging because we know as Christians that tomorrow is not promised and we must not assume what our futures will be like, but rather we are called to be responsible and submissive to God’s will.

 

 

 

 

References

Brealey, R. A., Myers, S. C., & Allen, F. (2020). Principles of corporate finance. New     York, NY: McGraw-Hill Education.

Horton, W. (2020, March 08). Air France-KLM Faces $1 Billion Fuel Hedging Loss As Oil Price Falls Due To Coronavirus. Retrieved June 17, 2020, from https://www.forbes.com/sites/willhorton1/2020/03/08/air-france-klm-faces-1-billion-fuel-hedging-loss-as-oil-price-falls-due-to-coronavirus/

Reiff, N. (2020, June 09). Hedge. Retrieved June 17, 2020, from https://www.investopedia.com/terms/h/hedge.asp

Bottom of Form

READ AND REPLY WITH 400 WORDS WITH TWO REFERENCES INCLUDING BIBLICAL REFERENCE

DB #4- Financial Futures by Region

            Financial futures are incredibly important to investors.  To sum it up briefly and easily, futures pretty much point you which way the market is going.  If futures are down, more than likely your stocks are down too (and vice versa).  As an avid investor I check the financial futures every day, and usually multiple times a day.  While I only check North American futures, other countries are involved as well.  

            The futures markets typically use high leverage. Leverage means that the trader does not need to put up 100% of the contract's value amount when entering into a trade. Instead, the broker would require an initial margin amount, which consists of a fraction of the total contract value. The amount held by the broker can vary depending on the size of the contract, the creditworthiness of the investor, and the broker's terms and conditions (Chen, 2020). 

            Some pros and cons of financial futures are: it can predict which way the market is headed.  Also,  they may only require a deposit of a fraction of the contract amount with a broker.  On the other hand, there is a higher risk involved with futures and because you are not paying the full amount, you may miss out on favorable price movement.  

            Looking at the graph provided, you can easily see that Asia & Pacific have the highest financial future turnover, meaning how fast a business conducts its operations (how much inventory is sold in a certain amount of time).  With the large population, it is no surprise that Asia & Pacific has the highest turnover.  North America is last on the list, Europe being the other and slightly ahead of North America.  That is somewhat surprising because as a country we are usually very efficient and profitable when it comes to operational tasks.  

             Financial futures are extremely helpful in the finance world.  It can tell you a great deal about the economy and what you may want to purchase on the stock exchange.  While it may not be full proof, and there are always some outliers, it serves as a great barometer.

“Wisdom is a shelter as money is a shelter, but the advantage of knowledge is this: Wisdom preserves those who have it.”- Ecclesiastes 7:12

 

References

Brealey, R. A., Myers, S. C., & Allen, F. (2020). Principles of corporate finance. New  York, NY: McGraw-Hill Education.

Futures. (2020). Retrieved 18 June 2020, from https://www.investopedia.com/terms/f/futures.asp

 

Financial Ratios. (2020). Retrieved 18 June 2020, from https://www.inc.com/encyclopedia/financial-ratios.html

 

Understanding Turnover in Accounting. (2020). Retrieved 18 June 2020, from https://www.investopedia.com/terms/t/turnover.asp