Southwest Airlines Case Questions You are expected to do all of your own work on this case. You can discuss concepts but not answers with a group of no more than three other students. However, prior to joining forces you are each expected to attempt to come up with your own answers. If you do meet with others, you should note their names on your case write up when you hand it in. This should appear on the third page of the case write-up. Be advised that you are not permitted to share answers. On the case second page, I expect you to write the following statement “I have followed the course rules for preparing my case write up” and sign your name pledging your honor. If you do not have this statement, your case will not be graded. Please be advised on the University’s Academic Integrity Policy. The case assignments should be done in font size “12” and doubled-spaced! In addition, the first page of the case report should be the cover page including the title of the manuscript, the author(s) name(s), and the following statement: ...presented as partial fulfillment of the requirements for Cases in Investments and Financial Engineering FIN 675, DePaul University, Winter 2016 Questions: 1. Why do firms like Southwest hedge? What are the benefits of hedging? [+10] 2. What is the strength of the relationship between crude oil and jet fuel? [+10] 3. (a) Evaluate each of the following proposed hedging strategies: [+60] i. Do nothing. ii. Hedge using a plain vanilla jet fuel or heating oil swap. iii. Hedging using options. iv. Hedge using a crude oil or heating oil futures contracts. What are the benefits of each hedge based on two fuel price scenarios in one year? In other words, assume in June 2002 that one of these scenarios occurs. Calculate your net cost of jet fuel under each scenario incorporating the hedging strategies used. For both scenarios, consider full hedging and a 50% hedge strategy. SCENARIO 1: 39.3 cents/gallon spot price for jet fuel; or $14.10 per barrel spot price for crude oil, and SCENARIO 2: 119.6 cents/gallon spot price for jet fuel; and $40.00 per barrel spot price for crude oil. 3. (b) Discuss the pros and cons of each hedging strategy. [+20] 4. What are the risks of being unhedged? Totally hedged? [+10] 5. What do you recommend to Scott Topping? Why? [+10]