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Southwest Airlines wishes to hedge against a rise in the price of jet fuel using crude oil. The current spot price of crude oil is $50 and they expect it to rise to $60 in three months. They can buy a call option today for the right to buy crude oil 3 months from today at $55 for $2 per barrel. Or they can buy a put contract for the right to sell oil three months from now at $45 for $1 per barrel. Each contract is for 1,000 barrels of oil. Do you recommend they buy the put or the call contract? Explain why the contract is a hedge against a higher price of jet fuel. How much money will they make on the contract if they are correct in their prediction?

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Financial Management, Finance

Category:- Financial Management
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