1.

You work in the Finance Department for Air Canada and are responsible for purchasing Jet Fuel. Jet fuel is a major expense for all airlines. You are considering hedging the purchase of 1 million gallons for one year from now. As a buyer, you are concerned about capping an increase in price. Forward contracts for delivery one year from now are available at $4.55/gallon. The premium on 1 year call options with a strike price of $4.55/gallon is $0.50/gallon and the premium on 1 Year Put options with a strike price of $4.55/gallon is $0.40/gallon.

1. What would be the net cost of the jet fuel purchase one year from now if you hedge the entire exposure using forward contracts (i.e. combine the purchase cost with the derivative payoff) and the price one year from now is $6.00 per gallon? answer format x.xx

2. What would be the net cost of the jet fuel purchase if you hedge the entire exposure using long call option contracts (i.e. combine the purchase cost with the derivative payoff) and the price one year from now is $5.00 per gallon? answer formatt x.xx

3. .What would be the net cost of the jet fuel purchase if you hedge the entire exposure using short put option contracts (i.e. combine the proceeds received with the purchase price of the jet fuel) and the price one year from now is $6.00 per gallon?