Southwest Airlines hedged the cost of jet Fuel by purchasing options that allowe

Question

Southwest Airlines hedged the cost of jet Fuel by purchasing options that allowed
the airline to purchase fuel at a fixed price for 5 years. If the market price of fuel was $0.50
per gallon higher than the option price in year 1, $0.60 per gallon higher in year 2, and
amounts increasing by $0.10 per gallon higher through year 5, what was the present
worth of SWA's savings per gallon if the interest rate was 10% per year? And can you
please tell me how you get the answer? We've been using Excel in class.

Explanation / Answer

the problem is numeric extensive so i will just tell you the steps.
first find the price saving each year
year no. Price savings
1 --------------0.5
2 --------------0.6
3 --------------0.7
4 --------------0.8
5--------------- 0.9
Then just divide the saving for ith year by (1.1)^i
i.e. for third year saving is 0.7 , so present saving = (0.7) / {(1.1)^3}
add the saving for 5 years.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.