Fuel Hedging

Fuel Hedging is a contractual tool some large fuel consuming companies, such as airlines, use to reduce their exposure to volatile and potentially rising fuel costs. A fuel hedge contract allows a large fuel consuming company to establish a fixed or capped cost, via a commodity swap or option. Large fuel consuming companies enter into hedging contracts to mitigate their exposure to future fuel prices that may be higher than current prices and/or to establish a known fuel cost for budgeting purposes. If a large fuel consuming company buys a fuel swap and the price of fuel declines, the company will effectively be forced to pay an above-market rate for fuel.
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