> Many companies already hedged the price of fuel so the oil glut isn't really helping them any.
It's really interesting that oil can be hedged against such a dramatic change. But not everything can be hedged in such a way. Do you have a simple explanation for what can and can't be hedged?
What matters for the financial hedge is the existence of futures, which means the companies can buy something they know they will need at a known price months before they actually need it. The specifics of this operation differs depending on the actual financial instrument used, but the idea is the same, even on the opposite side (selling at a known price in the future).
It is already a sunk cost if they just bought futures, so shouldn’t keep them from flying. They can take delivery to fly, or sell for someone else to take delivery at the low price.
The hedge must be more complicated to explain why they would stay grounded.
Hmm. I don't think the hedge is that complicated, so maybe it's not particularly relevant after all. I was just thinking of it in terms of complementary goods -- normally we'd expect suppliers to increase output when the cost of an input drops, but in this case they already ate that cost so the effect would be damped. But maybe not?
I suppose there's also a question of how long OPEC floods the market. But IDK, and you make a good point.
The futures contracts don't always guarantee delivery. "Cash-settled" instruments just pay out cash based on the market rate (with the expectation that the long party can purchase the oil at that price)
Anything can be hedged with a few legal exceptions) . That is what insurance is, a hedge against bad events. There are companies who specialize in insurance for one off events - for a price . For oil it works better because well drillers want to be sure they get enough money to pay off the well so someone is willing to take the other side and there is thus competition on both sides resulting in good deals.
It's really interesting that oil can be hedged against such a dramatic change. But not everything can be hedged in such a way. Do you have a simple explanation for what can and can't be hedged?