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, with the spot price peaking at $181.80 per barrel in July, and extensive hedging had made compelling sense during the run-up. Prices then collapsed: by early November spot jet fuel was $76.70 per barrel, a fall of about 57.8 percent from the peak. Cathay Pacific, which had hedged fuel it would buy in 2009, 2010 and 2011, estimated unrealized mark-to-market losses on those contracts of HK$2.8B as at the end of October, and its 2008 accounts carried unrealized mark-to-market losses of HK$7.6B on them, against realized hedging losses of HK$309M for the year. The Cathay Pacific Group reported an attributable loss of HK$8,558M for 2008, against a profit of HK$7,023M in 2007. Falling prices also lowered what Cathay would pay for the fuel those contracts covered, which is what a hedge is designed to trade away, but the contracts were marked to market in 2008 while that fuel would be bought in later years, so the hedge was visible as a loss before the saving it offset had happened. The annual report said that if Brent averaged about US$75 over the next three years there would be no further net cash impact and the 2008 losses would be released in later periods.
- 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.hkexnews.hk/listedco/listconews/sehk/2009/0402/ltn20090402735.pdf
- https://www.forbes.com/2008/11/06/cathay-hedge-loss-markets-equity-cx_vk_1106markets02.html
- http://www.china.org.cn/business/2009-03/11/content_17425217.htm
- https://www.federalreserve.gov/pubs/feds/2007/200713/200713pap.pdf
Confidence medium·Volatility low·Reviewed 2026-08-07·Owner unassigned
Contested
The HK$7.6B (HK$7,661M in the annual report's fuel cost table) is an unrealized mark-to-market loss on contracts maturing in 2009 to 2011, and it sits inside the HK$8,558M attributable loss rather than beside it, so the two should not be added. The dollar figure in this lesson's metadata is an approximate conversion of the HK$7,661M at the Hong Kong dollar's peg of about 7.8 and is indicative only. The $181.80 and $76.70 are Forbes's spot jet fuel figures for the July peak and early November 2008, and the HK$2.8B is Cathay's own estimate as at the end of October, as reported by Forbes.
Cathay's annual report says it used a combination of fuel derivatives, so the percentage of anticipated consumption hedged varied with the fuel price; the worked example simplifies this to swaps and a bought call. 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 lesson's claim is the general one, that a symmetric hedge is exact only at exactly the exposure, and it does not assert that Cathay's book was over-sized.
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.