7. The purpose of this question is to evaluate the effect of quantity uncertainty when using derivatives
Question:
7. The purpose of this question is to evaluate the effect of quantity uncertainty when using derivatives to manage risk. To explore this issue evaluate what happens if all the estimated fuel usage of 126,000 gallons is hedged with the swap in the following four scenarios:
Scenario A: Higher fuel usage combined with a high average fuel price. Specifically, 141,000 gallons of fuel used, average fuel price 4.20$/gallon, $1,456,000 revenue and other costs of $ 840,000
Scenario B: Lower fuel usage combined with a high average fuel price. Specifically, 111,000 gallons of fuel used, average fuel price 4.20$/gallon, $1,144,000 revenue and other costs of $ 660,000
Scenario C: Higher fuel usage combined with a low average fuel price. Specifically, 141,000 gallons of fuel used, average fuel price 3.30$/gallon, $1,456,000 revenue and other costs of $ 840,000
Scenario D: Lower fuel usage combined with a low average fuel price. Specifically, 111,000 gallons of fuel used, average fuel price 3.30$/gallon, $1,144,000 revenue and other costs of $ 660,000
For each scenario calculate the profit and the average price paid per gallon. Express all your calculated average prices per gallon with three decimals.