Category: Economics

Categories
Economics

[2006] Of did MAS buy a forward/future contract?

Analysts expect Malaysian Airlines System to make a loss in the order of RM2 billion for the first quarter of 2009. They attribute the loss to a hedging strategy “gone awry”: in times when jet fuel prices were over USD100 per barrel, MAS made a bet for prices to remain above USD100 per barrel. Now that prices are below USD100, MAS is in trouble.[1]

It is unclear what kind of hedging strategy MAS used but judging from the article — words like mark-to-market for instance and the fact that MAS is making large loss due to a hedging strategy when prices are below the agreed prices of delivery — I have a feeling that MAS bought future or forward contracts.

Forward and future contracts are commonly defined as a contract between parties to deliver or accept a certain quantity of goods at an agreed future date at agreed prices. Differences exist between the two but I feel they are unimportant in this case. The important characteristic is that at the agreed date, the contract must be fulfilled regardless of gains or loss on any side.

If it is true that MAS bought future or forward contracts, my question would be why?

Would it not be more prudent to purchase options instead of future or forward?

With options, the buyer will have two choices: buy from the spot market or execute the option. When spot prices are below the strike prices, a buyer can simply purchase from the spot market and hence, avoid the kind of loss a buyer would suffer under a future or forward contract.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

[1] — KUALA LUMPUR, June 12 — Malaysia Airlines (MAS) is expected to post a loss, which could exceed RM2 billion, on fuel hedges gone awry for its first quarter to end March.

RHB Research estimated the national carrier’s loss in the region of RM1.7 billion, a projection based on an MAS decision to adopt Financial Reporting Standard 139, requiring the company to recognise mark-to-market losses on its hedges. Industry executives, however, expect the loss to exceed RM2 billion.

When jet fuel was trading at well over US$100 (RM350) per barrel last year, MAS had bet on prices remaining high at around US$100 — but was caught out when the global financial crisis hit last year. The sharp pull-back in business activities quickly dragged down the price of crude oil to less than half at its lowest. [MAS’s Q1 loss expected to top RM2 billion. Business Times Singapore via The Malaysian Insider. June 12 2009]

Categories
Economics

[2000] Of a lesson for Malaysia from Ann Arbor

I had dinner with several alumni and professors from the University of Michigan yesterday and an economic professor recommended this article:

ANN ARBOR, Mich. — Michigan’s economy is the worst in the country, dragged down by its dependency on an ailing auto industry. But in a lab at Accio Energy in Ann Arbor, engineers Dawn White and David Carmein are driving in a different direction.

[…]

Michigan’s economic future rests on making the state look more like Ann Arbor, and less like Warren, 50 miles to the northeast, where factory buildings and warehouses built on the riches of the Big Three auto makers bear signs saying they are “priced to sell.” The latest blow came earlier this month, when Chrysler LLC shut down its two plants in Warren as part of its bankruptcy filing. [Ann Arbor And Warren: A tale of two economies. Justin Lahart. Wall Street Journal. May 26 2009]

Amid the rust belt, Ann Arbor is shining due to its highly educated labor force.

Categories
Economics Liberty Politics & government

[1999] Of I am endorsing Husam Musa

Why?

KUALA LUMPUR (Reuters) – An influential opposition leader running for a key post in Malaysia’s Islamist party has “guaranteed” a commitment to a free market economy and protecting the rights of the country’s multi-racial communities.

Husam Musa, vice-president of the Pan Malaysian Islamic Party (PAS), the country’s second largest party in mass membership, is vying to be PAS deputy leader at its five-day annual conference which starts on Wednesday. [Malaysia Islamist to protect free market, minorities. Razak Ahmad. Reuters. June 2 2009]

Right on!

Categories
Economics Politics & government Society

[1997] Of a story of abuse of power

Harun al-Rashid, the celebrated ruler who appears in the Tales of a Thousand and One Nights, reigned over an immense empire that stretched right across the Middle East and into Asia. He also won renown as poet and a lover of scholarship. When he was declared Caliph, Harun opened the treasury and distributed prizes to his friends and relatives. He hoped to receive a visit from Sufyan, his former teacher. When Sufyan failed to appear he wrote him a letter and sent a messenger named Abbad to deliver it. Abbad found Sufyan sitting with his companions inside a mosque. When he presented him with the letter Sufyan refused to touch it and instead asked one of his companions to read it for him. The letter said: ‘We await your coming to visit us; we are mindful of the friendship that binds us.’

Sufyan said to his companions: ‘Write my answer on the back of the letter.’ his disciples said, ‘Master you must write to him on a fresh sheet.’ ‘On the back of the sheet,’ he said again. he then dictated the following words: ‘To Harun the misguided, deprived of the sweetness of the Koran. You have opened the treasury of the believers and distributed its funds to gratify your desires. Have you asked permission of the widows and the orphans?’ and so on in this manner, concluding: ‘as for friendship, we have broken it off; no tie or affection binds us now. Do not write to us again; for if you do, we shall neither read your letter nor reply to it.’

After seeing this, Abbad went to the market, where he replaced his clothing with cheaper clothes. When he returned with the letter to al-Rashid, the Caliph understood the meaning of Abbad’s change of appearance and cried out, ‘The messenger has succeeded where his master has failed.’ When the Caliph read it he burst into tears and wept in the most piteous fashion. His courtiers said, ‘Sufyan has demonstrated his impertinence; have someone fetch him here.’ ‘Silence,’ said al-Rashid, ‘ for you are the ones who have misguided me.’ Harun preserved Sufyan’s letter and would take it out from time to time to read it. [Page 43-44. Chapter 4: The Servant State. Good and Bad Power: The Ideals and Betrayals of Government. Geoff Mulgan]

Categories
Economics

[1996] Of what increased trade surplus due to fallen imports typically means

There are a lot of things to be optimistic about. The recent increased in Malaysian net exports however is not one of them.

The increase is due to fallen imports. That is generally bad and especially so within Malaysian context. So, I will find my blood pressure spikes slightly whenever I read in the news and other writing of a slew of bad things only to read a negating adverb like, ‘however’, ‘nevertheless’, ‘nonetheless’, etc. to introduce the fact that net exports increased due to fallen imports. And it really pains me to see words like ‘fortunately’. There is nothing fortunate about it for heaven’s sake, unless you are a some kind of neo-mercantilists.

Why is it bad?

In the accounting of gross national product, the component imports is subtracted from exports because it is redundant to another component that is consumption. Imported goods, with the exception of intermediary goods which are meant to be reexported, are consumed locally.

For the reexported goods, it would be reflected in the exports component. For the imported and locally consumed goods, it will be reflected in the consumption component.

For the sake of clarity, the simple form of GDP is Gross Domestic Product = (Consumption + Investment + Government Spending + Net Exports), where Net Exports = (Exports – Imports).

Increased net exports due to lower imports, means consumption is suffering. That cannot be good for the economy, with all else being equal.