Industry who decides to hedge the need to purchase jet fuel

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Reference no: EM131844000

1. There are three primary airlines in the United States: Delta, American, and United. A major cost to airlines is jet fuel; assume United is the only airline in the industry who decides to hedge the need to purchase jet fuel. Which of the following statements is most accurate:

A) By entering a short hedge using future contracts, United should expect a less stable (more volatile) operating margin (EBIT/Sales) than Delta or American.

B) By entering a long hedge using future contracts, United should expect a less stable (more volatile) operating margin (EBIT/Sales) than Delta or American.

C) By entering a long hedge using future contracts, United should expect a similar volatility in operating margin (EBIT/Sales) compared to Delta or American.

D) By entering a long hedge using future contracts, United should expect a more stable (less volatile) operating margin (EBIT/Sales) than Delta or American.

E) By entering a short hedge using future contracts, United should expect a more stable (less volatile) operating margin (EBIT/Sales) than Delta or American.

2. Assume it is October 2017 and United needs to purchase 10,000 K units of Jet Fuel 3 months from now in January 2018. To hedge this risk, United decides to use the January 2018 Jet Fuel contract (which has the exact same date United needs to purchase the Jet Fuel). Which of the following statements is (are) TRUE:

A) I

B) II

C) III

D) II, III

E) I, II, III

Reference no: EM131844000

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