Futures contracts are a handy tool for investors
In 2005, Southwest Airlines bought future contracts to purchase oil at $50 per barrel two years later. After it bought those contracts, oil prices shot to $100 or so per barrel such that the value of those contracts doubled, earning Southwest additional income. Why did Southwest buy those contracts? Or alternatively, why didn’t other airlines take such a risk?
Usually one assumes futures markets are about speculators like Long Term Capital Management L.P., which lost billions in 1998 using the famous Black–Scholes mathematical model for financial derivatives. The Federal Reserve actually stepped in to run the company to quell the financial chaos Long Term Capital Management’s demise would have created. Such situations, though, mask the rather mundane actions of purchasing futures: think boring insurance policy, not slick Wall Street speculation.
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