5. Case Studies (Real-World Applications)
Case Study 1: Airline Fuel Hedging (Futures)
Situation:
An airline expects fuel prices to rise.
Strategy:
Locks in fuel price using futures contracts.
Outcome:
- Prices rise → saves cost
- Prices fall → pays slightly more but avoids uncertainty
Key Insight:
Futures provide certainty, not flexibility.
Case Study 2: Portfolio Protection (Put Options)
Situation:
An investor fears a market crash.
Strategy:
Buys put options on a stock index.
Outcome:
- Market drops → losses offset
- Market rises → only loses premium
Key Insight:
Options act like insurance with limited downside.
Case Study 3: Commodity Producer (Short Hedge)
Situation:
A palm oil producer fears falling prices.
Strategy:
Sells futures contracts today.
Outcome:
- Prices fall → protected
- Prices rise → misses extra profit
Key Insight:
Hedging focuses on stability over maximizing gains.
Case Study 4: Importer Hedging Currency Risk (Options)
Situation:
A company must pay USD in 3 months.
Strategy:
Buys a call option on USD.
Outcome:
- USD rises → protected
- USD falls → benefits from lower rate
Key Insight:
Options provide protection with flexibility.
6. Strategy Comparison
| Strategy | Risk Protection | Upside Potential | Cost |
|---|---|---|---|
| Futures | High | Limited | No upfront premium |
| Options | Flexible | Preserved | Premium required |
7. Key Takeaways
- Futures = obligation + certainty
- Options = flexibility + limited risk
- Hedging = reducing uncertainty, not maximizing profit
- Simple payoff visuals help understand risk clearly
8. Quick Practice
Scenario:
A coffee exporter expects prices to fall.
Question:
What trade-off are they making?
Should they use futures or a put option?