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Suppose the price of gasoline per gallon is currently $5. The risk manager of Universe Airlines expects the price per gallon next year to be either $7 or $4 with equal probabilities. The company plans to buy 1 million gallons of gasoline in one year. The risk manager is concerned about future rising cost of gasoline and is considering using either futures or calls to hedge against the risk. Suppose the riskfree interest rate is 10% per annum.

a. What is the futures price of gasoline per gallon for delivery in one year?

b. What are the possible payoffs of the futures one year from now?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92167127

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