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Cathay moves to check losses on fuel hedging

source:Cargonewsasia author: time:2009-03-20  

Cathay Pacific Airways was planning to switch its fuel-hedging strategy to provide more comprehensive protection against changes in oil prices after posting a record loss of US$1.1 billion last year, the South China Morning Post reported.

To mitigate potential losses if oil prices fall further, Cathay will restructure its hedging strategy to buy cash call options instead of zero-cost three-way options.

In the past, Cathay adopted a three-way option hedging, which provided limited protection against oil price volatility.

The advantage of three-way hedging, or the so-called collar option, is that the airline does not need to pay cash in advance to buy insurance against price volatility.

However, the disadvantage is that when oil prices fall steeply, the company will be exposed to huge losses. This happens because the airline will sell a put option to the counterparty, obliging payment of the difference between the actual oil price and the contract price.

Some experts do not have much expectations from a possible shift in policy.  

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