Hedging Costs

Overview

When a product or service takes an extended period of time to produce and/or deliver, some companies find it useful to hedge the costs that are inputs to that product or service, when possible.

As an example, an airline begins selling tickets on a flight that will occur in the future. Because they are setting the ticket price today, they will know what the maximum fuel cost they can bear to make the flight profitable. If the firm can lock in a rate in the futures market they may be able to lock in the profit on the scheduled flight, otherwise, they face a loss if fuel prices rise before the flight.