Fuel Hedging Strategy Analysis for Southwest Airlines
DOI:
https://doi.org/10.54097/wjvj0y43Keywords:
Derivatives Market; Aviation Market; Hedging Strategy.Abstract
As the global economy experiences heightened volatility in stock prices, interest rates, and exchange rates, risks in financial markets have intensified significantly. In response to these growing risk exposures, investors and corporations are increasingly turning to financial derivatives—such as futures, options, and swaps—to manage their vulnerabilities. These sophisticated instruments empower market participants to hedge against adverse price movements, optimize portfolios, and seize strategic opportunities through advanced data analysis. The derivatives market offers a wide array of benchmark products, including those tied to critical commodities like energy. This paper presents a focused case study on the hedging strategies of Southwest Airlines, a prominent US carrier renowned for its proactive use of derivatives to mitigate the financial impact of jet fuel price fluctuations. The analysis delves specifically into the structure and mechanics of its short call and short put options strategies, examining their intended outcomes and inherent risks. By providing a detailed examination of this real-world application, the study offers valuable empirical insights. It serves as a practical reference for other airlines and commodity-dependent industries seeking to design and implement effective risk management frameworks using derivative market instruments.
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