Curriculum·R406 Options and Structured Positions·about 33 min
Practical structures, hedging first
By the end of this lesson you can
- →Build the four basic structures and state what each one caps
- →Distinguish a symmetric hedge from an asymmetric one, and when each is correct
- →Compute what over-hedging costs when the price moves in your favor
- →Apply the hedging-first rule, which is to bound an exposure you already have
Senior · enrolled learners
This lesson opens with Cathay Pacific's fuel hedges, 2008.
- What happened
- Jet fuel rose steeply through the first half of 2008, peaking around $181.80 per barrel in July, and airlines that had locked in forward prices were widely regarded as prudent. Prices then collapsed, reaching about $76.70 per barrel by late in the year, a fall of about 57.8 percent from the peak. Cathay Pacific recorded a provision of HK$7.6B on its fuel hedging positions, having reported HK$2.8B in October as prices continued to fall. Its parent, the Swire Group, reported a loss of HK$8.7B for the year, the airline's first major loss since the late 1990s. The physical fuel bill fell at the same time, which is what the hedge was designed to trade away, but the hedged volumes and the accounting recognition made the position visible as a loss rather than as a locked-in price.
- The decision point
- A hedge that loses when prices fall is a hedge working as specified, because the physical saving offsets it, and that is the honest reading of most of this. What a symmetric hedge cannot do is be approximately the right size. It is exact only at exactly the exposure you have, and it turns into a speculation in either direction the moment the hedged volume and the real volume differ. An asymmetric hedge cannot overshoot, and the premium is what that property costs.
- Recorded loss
- $980,000,000
What you will be able to answer
- →What do the four structures cap?
- →Symmetric or asymmetric?
- →What does over-hedging cost?
- →What is the hedging-first rule?
Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.
It is free. We do not sell the list and there is nothing to buy at the end of it.
Sources and review
- https://www.spacemart.com/reports/Cathay_Pacific_books_7.6_billion_HK_dollar_loss_over_oil_hedging_999.html
- https://www.forbes.com/2008/11/06/cathay-hedge-loss-markets-equity-cx_vk_1106markets02.html
- http://china.org.cn/business/2009-03/11/content_17425217.htm
- https://www.thestandard.com.hk/section-news/section/2/228370/Cathay-Pacific-must-cut-down-oil-hedging
Confidence medium·Volatility low·Reviewed 2026-08-07·Owner unassigned
Contested
The HK$7.6B figure is a provision on hedging positions and the HK$8.7B is a group-level loss, and the two should not be added. The dollar figure in this lesson's metadata is an approximate conversion of the hedging provision at 2008 rates and is indicative only. How much of the outcome was over-hedging as against ordinary mark-to-market on a correctly sized hedge was debated at the time and is not resolved here, per P6.
The three-way comparison in part two uses stated inputs of 10 million barrels of consumption, a $100 reference price, a $12 per barrel call premium and a fall to $76.70. These are illustrative and chosen so the arithmetic is checkable, not a reconstruction of any airline's book.
J312-03 owns self-insurance and structural hedges that require no counterparty. This lesson owns option structures, which do. R401-05 owns basis and carry. Keep both splits.