AIR, an airline company, used to deal only in derivatives of futures and swaps to hedge its jet fuel market risk. However, in the mid 2003, AIR started trading in speculative derivative options and took a bullish view of the jet fuel market. The company predicted correctly but by the end of 2003, AIR revised its strategy to a bearish stance. The CEO signed contracts with several banks, buying put options and selling call options, but the prices soared above the strike price of the call, and AIR faced a large deficit. 1. Explain how AIR could have floored the losses through an adequate risk management procedure
AIR, an airline company, used to deal only in derivatives of futures and swaps to hedge its jet fuel market risk. However, in the mid 2003, AIR started trading in speculative derivative options and took a bullish view of the jet fuel market. The company predicted correctly but by the end of 2003, AIR revised its strategy to a bearish stance. The CEO signed contracts with several banks, buying put options and selling call options, but the prices soared above the strike price of the call, and AIR faced a large deficit. 1. Explain how AIR could have floored the losses through an adequate risk management procedure
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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AIR, an airline company, used to deal only in derivatives of futures and swaps to hedge its jet fuel market risk. However, in the mid
2003, AIR started trading in speculative derivative options and took a bullish view of the jet fuel market.
The company predicted correctly but by the end of 2003, AIR revised its strategy to a bearish stance.
The CEO signed contracts with several banks, buying put options and selling call options, but the prices soared above the strike price
of the call, and AIR faced a large deficit.
1. Explain how AIR could have floored the losses through an adequate risk management procedure
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