Originally posted by 99blacksesport: Wow, who woulda thunk'ed that my inedjucated guess woulda been so darn good???
There's a similar process in bonds, referred to as duration... when fund managers have to make known cash flows, say an annuity that has a $100k payment due in 8 years, they can invest in bonds to make sure that they have the money. They invest the, say, $60k in bonds with a duration of 8 years, and a total value at that time of $100k. This way, they can invest in bonds of different maturities, paper rates, yields-to-maturity, etc.
The concept in fuel is essentially the same, except you're buying puts, calls, and various other options/futures for fuel in varying amounts to hedge your bets. You think that fuel prices are going to be at $3 in 2006, so you buy options that lock in your price for 2006 at $2.20. If gas prices hit $3, you're a big winner, but if gas prices drop and are only $2/gal, you lose. There are highly complicated mathematical formulas that go into this, and lots of speculation is involved.
