Ever wonder why those airfares are quick to climb, but slow to land? Well, you can blame the risk managers.
When the oil price hit $147 a barrel in July ’08, with all the pundits predicting sustained $200 levels, what would you have done if you were risk managing an airline’s exposure to fuel? You would have ran and paid an arm and a leg to hedge it. Hedging would essentially fix the price for your company around $150 level, no matter how the market moved. Now you sit back and relax, happy in the knowledge that you saved your firm potentially millions of dollars.
Then, to your horror, the oil price nosedives, and your firm is paying $100 more than it should for each barrel of oil. (Of course, airlines don’t buy WTI, but you know what I mean.) So, thanks to the risk managers’ honest work, airlines (and even countries) are now handing over huge sums of money to energy traders. Would you rather be a trader or a risk manager?
And, yes, the airfares will come down, but not before the risk managers take their due share of flak.
- Ambition vs. Greed
- Risky Business
- Hedging Dilemma
- Where Credit is Due
- Quant Culprits
- Free Market Hypocrisy
- House of Cards