You work for Delta Airlines. Last year, total revenues were $15 billion and total costs were $14 billion. One of the biggest expenses for Delta is fuel costs, which totalled $2.5 billion last year. This cost represents 100 million barrels of oil consumed at an average price of $25 / barrel.

a)Suppose Delta Airlines does not plan to use any hedging tool. If revenues and other costs are constant, how does Delta's net income change if the oil price drops to $20? And how does the net income change if the fuel cost increases to $30? Will you conclude the relationship between fuel cost and Delta's net income is positively related or negatively related?

Following the previous example about Delta Airlines. Delta has been in contact with two banks for possible option contracts now (April 21, 2021).

Bank ABC has offered Delta a 6-months option with strike price $24 / barrel

Bank XYZ has offered Delta a 12-months option with strike price $24 / barrel

Given the information,

a)Which option has a higher value (option price) by comparing the contract offered by Bank ABC and Bank XYZ? And why?

b)If Delta has chosen to sign the contract with Bank ABC, and has asked the bank to decrease the strike price stated on the contract, do you think the option value would increase or decrease once the strike price has been lowered?

c)Suppose on October 21, 2021 (6-months option expiration date), the fuel price is $26 / barrel, should Delta exercise the option? Why or why not?