{"id":4453,"date":"2009-06-12T11:47:27","date_gmt":"2009-06-12T03:47:27","guid":{"rendered":"http:\/\/maddruid.com\/?p=4453"},"modified":"2009-06-12T11:51:57","modified_gmt":"2009-06-12T03:51:57","slug":"2006-of-did-mas-buy-a-forwardfuture-contract","status":"publish","type":"post","link":"https:\/\/maddruid.com\/?p=4453","title":{"rendered":"[2006] Of did MAS buy a forward\/future contract?"},"content":{"rendered":"

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]<\/small><\/sup><\/a><\/a><\/p>\n

It is unclear what kind of hedging strategy MAS used but judging from the article \u2014 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 \u2014 I have a feeling that MAS bought future or forward contracts.<\/p>\n

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.<\/p>\n

If it is true that MAS bought future or forward contracts, my question would be why?<\/p>\n

Would it not be more prudent to purchase options instead of future or forward?<\/p>\n

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.<\/p>\n

\"Mohd \"Mohd \"Mohd<\/p>\n

[1]<\/sup><\/a> <\/a> \u2014 KUALA LUMPUR, June 12 \u2014 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.<\/small><\/p>\n

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.<\/small><\/p>\n

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 \u2014 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<\/em><\/a>. Business Times Singapore via The Malaysian Insider. June 12 2009]<\/small><\/p>\n","protected":false},"excerpt":{"rendered":"

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 […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[10],"tags":[756,757,755,753,754],"class_list":["post-4453","post","type-post","status-publish","format-standard","hentry","category-economics","tag-forward-contracts","tag-fuel-prices","tag-future-contracts","tag-malaysian-airlines","tag-options"],"_links":{"self":[{"href":"https:\/\/maddruid.com\/index.php?rest_route=\/wp\/v2\/posts\/4453","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/maddruid.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/maddruid.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/maddruid.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/maddruid.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=4453"}],"version-history":[{"count":5,"href":"https:\/\/maddruid.com\/index.php?rest_route=\/wp\/v2\/posts\/4453\/revisions"}],"predecessor-version":[{"id":4459,"href":"https:\/\/maddruid.com\/index.php?rest_route=\/wp\/v2\/posts\/4453\/revisions\/4459"}],"wp:attachment":[{"href":"https:\/\/maddruid.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=4453"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/maddruid.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=4453"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/maddruid.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=4453"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}