Fuel Hedging

In the maritime context, fuel hedging is a risk management strategy used by shipping companies to protect against the volatility of fuel prices. It involves the use of financial contracts, known as derivatives, to lock in a future purchase price for fuel. The main goal of fuel hedging is to create predictability in budgeting by fixing the cost of fuel for a certain period, thus reducing the risk of price fluctuations. This strategy is particularly important in the maritime industry, where fuel costs can represent a significant portion of operating expenses. The two most common types of fuel hedging strategies in the maritime industry are futures contracts and options contracts. Futures contracts obligate the buyer to purchase a certain amount of fuel at a predetermined price at a specific future date. Options contracts, on the other hand, give the buyer the right, but not the obligation, to purchase fuel at a predetermined price before a specific date. Both strategies have their advantages and disadvantages, and the choice between them depends on the company's risk tolerance and market expectations.