To appreciate the way that derivatives have played a role in Southwest Airlines financial performance the subject may be discussed, looking at what is meant by the term derivative and the way they are used by Southwest in their hedging strategy, along with consideration of the reasons the firm may have utilized this strategy along with the results achieved by the firm. Derivatives are financial tools designed to create a price exposure based on the valuation of an underlying asset, commodity or even event and capture the market price changes or fluctuations (Dodd, 2002)
This indicates the risk associated with hedging. However, without hedging Southwest Airlines would have faced losses at a much earlier date, in 2004 (Gimbel, 2008)
A brief consideration of the different categories of derivatives will help one to appreciate the way in which they may be used by firms such as Southwest, usually with the aim of reducing some type of risk as part of a wider risk management strategy. A forward is one of the oldest types of derivative, with records of this type of people demonstrating its use as long ago as 2000 BCE in India (Markham, 1987)
The price of aviation fuel in the future contract turned out to be much higher than the spot price at the time of purchase, and resulted in the airline making a loss of $992 million (Brooks, 2008). This resulted in the airline posting a loss in the third quarter of that year (Pae, 2008)
It is argued that the strategy of undertaking hedging may help to prevent potential bankruptcy costs, as creditors may feel more confident in management of the company and their ability to recover debts (Ross, 1996). Ironically, it is companies that face the greatest financial challenges/difficulties which are least able to undertake risk management from hedging in derivatives (Rampini et al
The recent strategy includes utilizing derivatives where the underlying commodity is heating oil and kerosene. These commodities are highly viable as they are aligned with aviation fuel, utilizing the same inputs, and Southwest Airlines may benefit from the greater degree of liquidity facilitated by the larger trading market for these commodities, both traded on the New York Mercantile Exchange (NYMEX) (Sadrinna, 2010)
Basis risk occurs as a result of the potential difference between the contract spot price for a commodity and the agreed price for the underlying commodity in the derivative. The derivative price for the commodity will reflect the market expectations of the future influences on the commodity, whereas the spot price is the current price (Sandaran, 2010)
The study of finance is apprehensive in how the system organizes and channelizes flow of money through the lender-borrower relationship. This relationship is a link up due to the difference in positions of some people or firms amongst themselves (Burton & Brown, 2009, pg 7)
Any impending set back that might be experienced is refrained from causing termination of the decision. Finance plays a considerable by providing a foundation on which rational policies are made by individuals, practitioners, managers and the business markets (Deaves & Ackert, 2009, pg 3)
Finance and Financial System Overview of Financial System Finance is a commercial study concerning management of money and other assets through crediting, banking and investing. It is an outgrowth of economics and accounting (Houston & Brigham, 2009, pg 4)
Financial system refers to market rates as the asset prices allocated to goods in a market. Agents of the assets optimize the rates by reflecting on the tendency of the demand chain of the asset in market (Rieger & Hens, 2010, pg 167)
Financing policies and programs need to dig into dynamics of this system. The financial innovation systems strengthen capabilities of achieving developments (Wonglimpiyarat, 2011, pg 36)
Considering the higher industry average, this is a worrying trend. The return on total assets is often a good measure of how effective an entity's management is when it comes to the generation of profits using the assets of the firm (Graham, Smart, and Megginson, 2009)
The court would no longer want to risk public instructors' engaging in religious instruction by allowing them into religious classrooms (LII). Dissenting Opinions Justice Sandra Day O'Connor argued that the Title I program did not present the risk of advancing religion (Carlson, 1986)
It, therefore, directly contradicts the absolute separation between public and private schools (LII; CPE, 2009). Impact on Education and School Operations Supreme Court decisions on education in combination with religion always affected public financing, especially of church schools (Payne, 2012)
Proposition 21/2 lowered the rate to $25.00 per $1,000 of automobile valuation that resulted in a 21/2 per cent excise rate (Bal & Nunes, 2007, 1-9)
This further included income tax rates. It also required a two-thirds majority vote in local elections for local government units that wanted to increase special taxes (Ferreira, 2009, 661-662)
What is also different is that in the New York State legislature the teachers unions have been able to crush such initiatives before in the previous ten years. They could not stop this one though (Hakim, 2011)
They cite a parcel tax of $293 annually per property levied on behalf of the Palo Alto Unified School District on all property within the district boundaries. This 2001 tax needed a two- thirds majority to pass (Wasi & White, 2005, 61)
The systematic risk indicates how including a particular asset in a diversified portfolio will contribute to the riskiness of the portfolio. Unsystematic risk, which is firm-specific or diversifiable risk, is the portion of an asset's total risk that can be eliminated by including the security as part of a diversifiable portfolio (Mathis, CAPM, par