Question 5: Hedging using futures (10 points) When oil skyrocketed between mid 2006 and 2008, airline companies increased their use of commodity derivates to reduce their exposure to raising jet fuel prices. This problem shows the effect of fuel hedging for Southwest. On December 315' 2007 the COO of Southwest came out with an estimate of expected fuel consumption for the year 2008 of 1,511 million of gallons. On the same day, the market price of jet fuel per gallon was $2.71. The company wanted to hedge its expected fuel consumption over 2008. Assume that it is now August 20'", 2008. The CFO has to set up the hedge for the next month (8/21 to 9/22). To set up the hedge, the CFO decides to utilize NYMEX Crude Oil futures. Crude Oil Futures trade in units of 1,000 US barrels (42,000 gallons) and they are available for maturities of 30 consecutive months. In addition, the trading of such instruments terminates at the close of business on the third business day prior to the 25th calendar day of the month preceding the delivery month. Data on futures prices for instruments with various expirations