Consider the situation of United Airlines (UA), an international airline based in United States of America....

Consider the situation of United Airlines (UA), an international airline based in United States of America. As part of its business it is heavily exposed to fluctuations in the price of jet fuel and foreign exchange rates. It sells tickets in foreign currencies and has significant EUR costs. For either jet fuel costs or forex, evaluate one derivative product UA could use to hedge fluctuations in the underlying price.

• Briefly describe how the product would be used to hedge the fluctuations

• Discuss the pro’s and con’s of this product

• Suggestions and recommendations

Your answer should be no more than 500 words

Expert Solution

· For hedging fuel costs airlines can buy call option.

For example if price of oil is $40 per barrel and if airline is afraid that price of oil will increase than it can purchase call option , which will give it a right to purchase oil at a specific price in future.

· Pros of purchasing call option: if price rises significantly, airlines can still buy at predetermined price. Risk is capped.

· Cons of Purchasing call option: loss of premium due to time decay. Premium cost will raise overall; expenses.

· As airlines is not in the business of speculating on fuel prices , it is advisable to always hedge against volatility of fuel prices. When cost of fuel is capped airlines can focus on core business and not get worried on cost of fuel which is a major cost for airline.

jeff jeffy answered 2 years ago

US airlines – Case Study The United States Airline Industry The U.S. airline industry has long...

US airlines – Case Study The United States Airline Industry The U.S. airline industry has long struggled to make a profit. Analysts point to a number of factors that have made the industry a difficult place in which to do business. Over the years, larger carriers such as United, Delta, and American have been hurt by low-cost budget carriers entering the industry, including Southwest Airlines, Jet Blue, AirTran Airways, and Virgin America. These new entrants have used nonunion labor, often...

5. American Airlines (AA) and United Airlines (UA) are engaging into the following one-shot simultaneous game:...

5. American Airlines (AA) and United Airlines (UA) are engaging into the following one-shot simultaneous game: if AA advertises for a fair from Newark to Chicago and UA does not, AA will make $20 million in profits and UA will make $6 million. If UA advertises and AA does not, AA will make $2 million and UA will make $6 million. If AA advertises and UA advertises, each firm earns $10 million. If neither firm advertises, UA will make $8...

comparative advantage of the United States of America

Select a country of your choice (other than Saudi Arabia) and discuss its comparative advantage—the sources and the challenges. What is the role of the government? Does the government provide additional investment? What could increase their advantage?

a. “Industrialised countries such as the United States of America, Germany, France and the United Kingdom...

a. “Industrialised countries such as the United States of America, Germany, France and the United Kingdom dominate world trade.” Can you relate this statement with one of the recent theories/models of international trade which predicts that more trade will take place between similar countries? What assumptions of the factor proportions model does this theory violate? Explain your answers.

is the United States a friend or foe to Latin America? explain

Consider virtually any airline flying domestically in the United States. Most carriers have a weight limit...

Consider virtually any airline flying domestically in the United States. Most carriers have a weight limit of 50 lbs. per bag that is to be checked into cargo. Additionally, we will assume from available data that the weight of people in the United States is, on average, 172.2 lbs. with a standard deviation of 29.8 lbs. 1. Assuming a group of 100 passengers travel, discuss for this data the worst possible case of weight distribution (leading to a tail-heavy plane)....

Consider the role of the United States Treasury Department, the Internal Revenue Service, in International Taxation....

Consider the role of the United States Treasury Department, the Internal Revenue Service, in International Taxation. What do you think are the major obstacles facing the Internal Revenue Service as our markets continue to become more international? As you continue to evolve in our international markets, how might the Internal Revenue Service’s role change?

Discuss the strengths and weaknesses of the structure of government in the United States of America....

Discuss the strengths and weaknesses of the structure of government in the United States of America. Please provide your understanding of the three branch of government as well as your views on whether they conflict with States rights.

Consider the market for airline tickets. For the purpose of answering this question, suppose the airlines...

Consider the market for airline tickets. For the purpose of answering this question, suppose the airlines are perfectly competitive. Demand for airline tickets is given by Qd=3600-1000P and supply is given by Qs=500P Draw a diagram of this market, where the horizontal axis is total miles flown in a year, and the vertical axis is price per mile. Show the effect on this market of providing a subsidy of $1 a mile on the producer. Label the diagram and identify...

Southwestern Airlines Co. operates a passenger airline thatprovides scheduled air transportation services in the United...

Southwestern Airlines Co. operates a passenger airline that provides scheduled air transportation services in the United States. Its stock trades at $32.50 per share over the NYSE. As of December 31, 2019, the company operated 694 aircraft, including 606 Boeing 737 aircraft and 88 Boeing 717 aircraft. It served 97 destinations in 41 states, the District of Columbia, and the Commonwealth of Puerto Rico, as well as 6 near-international countries, including Mexico, Jamaica, The Bahamas, Aruba, Dominican Republic, and Bermuda....

Question