Wikipedia’s answer is that a Futures Market a financial exchange in which people can trade Futures Contracts. Well, what is Futures Contracts? Futures Contracts is a legal agreement for the purchase of specified quantities and prices at specified future dates. Click here!
Contract should always be stressed. Futures Markets are different than, for instance, Stock Markets in that they trade contracts rather than shares. No, you’re not purchasing or selling shares of a business. Futures Contracts involve an agreement made between investors on the trade of certain quantities of financial instruments or commodities, like gallons of gasoline or tons of grain.
You can easily understand how commodities operate. The workings of commodities are fairly simple.
Southwest Airlines, on the other hand, made no money at a fuel price of $140/barrel. In the past, oil prices were cheaper and they had made Futures Contracts. However, delivery was not until 2007-2008. Futures Contracts are being purchased now for delivery 2011/2012, once the price of petroleum is affordable again.
Then you might say: That is all very well, but using trading strategies and a trade system to make money, or even negotiating, does not count.
Risk is inherent in each Futures Contract. Futures Contracts mitigate risk against value of the asset.
Southwest acquired the risk. In the event that the price of oil fell below the amount they paid for, they would have paid more. Simultaneously the risk was reduced because they believed oil’s price would increase. They were able to make money with leverage.
The oil companies. Since they were confident that the crude oil prices would not fall below their contract price with Southwest, this reduced their exposure to risk. As the price of the oil increased, the company acquired more risk (and lost the additional income they would have made). It is possible that their leverage may not have been as effective as they could have expected.