Market participants in commodity future markets

CFA Level II Alternative Investments
#1

In Reading 42, the CFAI book says

"Airline companies, for example, often appear as long hedgers to guard against increasing fuel prices, the underlying in which the airline companies are short"

I am bit confused on the word _ short. _ Can anyone clarify if they intend to say short as in buy(long)/sell(short) or do they mean short as in shortage of underlying (i.e. fuel). Clearly airlines buy fuel so practically they can not be short on fuel.

#2

Short as in buy(long)/sell(short). What does a short investor pray for every night? That prices will fall.

So do airlines: they’d like to see a fall in fuel prices.

#3

Thanks for looking into this.

Sure. Short benefits from price drop because short investor has already taken a position to deliver a commodity and for that he/she has agreed on a price. So it is in his/her interest for commodity price to drop so that he/she can buy cheap on the delivery date (or may be little prior to delivery).

In our case the question is pertaining to Airlines who are in need to buy fuel and obviously at lower price but I can’t envisage airline company as short investor because they can’t commit to someone else to sell fuel. It is other way round actually. I mean they are in need to buy commodity.

I hope I am clear.

#4

Look at it this say. They have commited ( sold tickets at a price X) to transport people next week. When the time comes to actually transport them, they will have to buy fuel at market prices. So they pray the prices will fall by that time. Just like a short investor.

#5

Here’s a long investor

#6

The reason you’re confused about the word “short” in this quote is that it’s misused (or, at least, used in a very weird way).

Airlines are not short fuel. They’re short the cash they use to buy fuel; they’re long the fuel.

They’re hedging against the value of their cash decreasing (vis-à-vis jet fuel).

#7

Thanks S2000.

#8

You’re welcome.