Suppose an airline goes directly to the jet fuel market and agrees to buy 100,000 gallons of jet fuel in three months. Assume this 100,000 gallons represents 50 percent of the estimated fuel that will be needed by the airline for the month following delivery (200,000 gallons needed) at the time of maturity of the forward position. The price per gallon locked in with the futures contract is $5.00 per gallon. If the price per gallon at maturity is 5.50:

1. What would an airline have to pay for fuel in three months with no hedging?
2. With the hedging, what would the airline pay for fuel?
3. Did the airline gain or lose with the hedge, and what was the dollar amount?

Answer the same three questions with a price at maturity of $4.50 per gallon.

Answer rating: 100% (QA)

1 Without hedging if the price per gallon at maturity is 550 the airline would have to pay 550 per g... View the full answer