The Study On The Use Of China Eastern Airlines’ Derivatives

As the development of financial markets and financial instruments, derivatives have become increasingly known to everyone. With the increasingly widespread use of derivatives, for companies to reduce the risks associated with it has also produced many problems. With the process of economic globalization, international trade is now more and more frequently, the use of derivatives for risk management is more demanding, therefore this paper selects Eastern Airlines (CEA) as a case study. CEA is a large state-owned airline, operates mainly in the shipping industry, the annual fuel costs are high. And CEA involves many multinational businesses, while international market exchange rate is constantly changing. So CEA uses crude options, foreign exchange forwards and interest rate swaps these three derivatives, to deal with annual crude oil price changes, the risk of changes in foreign exchange and interest rate risk. But the abuse of CEA’s derivatives once lead to multi criticism, especially in the2008fuel hedging huge loss event which let CEA became the target of public criticism. So the necessity of the use of derivatives has become a hot topic now. But the current domestic and foreign scholars for CEA’s research focuses on the2008CEA crude oil option investment loss event itself. Scholars have neither studied the use of derivatives CEA continuous situation in detail, nor the use of the other two derivatives.This paper takes from2007which the new accounting standards issued to2012as the study interval. According to the risks faced by CEA, to analyze the use of the company’s crude oil option contracts, foreign exchange forward contracts and interest rate swap contracts specific circumstances. And analyze the CEA’s investment in derivatives consequences. For detailed disclosure of the contents of crude oil option contracts on investment, this paper analyzes the specific circumstances of its investment contracts to analyze the success of the investment. For foreign exchange forward contracts and interest rate swap contracts, because there is no specific detailed disclosures CEA contract terms, we use financial statements and financial data disclosure statements make assumptions and simulation, to investigate whether the use of derivatives hedging purposes. This analyze concluded that CEA gambled with internationally renowned investment bank on fuel hedging contracts, which totally did not play the role of risk management, but increased business risk. While foreign currency forwards and interest rate swaps are not simply the actual conduct of the hedging, there is the possibility of speculative arbitrage.In the end, this paper describes the necessity for CEA to use derivatives, and give three suggestions for CEA to keep investing in derivatives for risk management. I believe this comprehensive analysis of this paper allows us to understand CEA derivatives investment situation better, and to understand the direction of future investment in derivatives better.