Security & Risk Evaluation

Exercises 11

Exercise 2: JetBlue Risk Management Analysis2

Hedging Techniques Available to JetBlue Airline2

JetBlue Hedging Techniques3

Recommendation For JetBlue's Hedging5

Exercise 3: JetBlue Business Analysis5

Strategy5

Financial Analysis6

Income Statement & Balance Sheet Financial Analysis6

Financial Ratios Analysis8

Corporate Finance13

Management13

Valuation14

References17

Security & Risk Evaluation

Exercises 1

Price = C / (1 + r) ^ n

i.e. Price = Payments / (1 + discount rate) ^ number of year

Therefore, the price of a 10 year US Treasury STRIP is: 10,000 / 1.05 ^ 10

So, Price = 10,000 / 1.6289

Price = 6139.13 or 6139

Yield To Maturity = [C + (F - P / n)] / (F + P / 2)

Where, C = Coupon or interest payment

F = Face Value

P = Price

n = number of years to maturity

Therefore, YTM is approximately 64%, since coupon payment is 6% or 3.00; price is $97; years to maturity are 3; and face value is 1000.

Present Value of Growing Perpetuity = D1 / (r - g)

Where, D = dividend or coupon at period 1

r = discount rate

g = growth rate

Therefore, PV of Growing Perpetuity is $33.33.

The estimated monthly payments are $ 1,610.46 and I will pay $ 279,767 in interest over the life span of the loan. The outstanding loan immediately after my first payment will be $ 299,640.

As the years to retirement are 35 and there will be 5% real (after-inflation) during my working years, the present value would be $16,374,194.29 and the future value would be $90,320,305.74. The years to die after retirement are 30 and the real after-inflation rate will be 3% then the present value would be $19,600,441.35 and future value would be $47,575,414.86. Therefore, the amount I need to save is $35974635.64.

Exercise 2: JetBlue Risk Management Analysis

Hedging Techniques Available to JetBlue Airline

Airline, like JetBlue, have different option for employing strategies ranging from fully hedging using a combination of commodities to not hedging in order to save cost, avoid potential losses, and increase profits. Different strategies are available to airlines for hedging, including future contracts, over-the-counter derivatives, as well as not hedging, and assessing the efficiency and merits of each. Over the counter instruments or options involve swaps and collar structures that are used as the key hedging derivatives by the airlines (Cobbs, 2004). For example, Southwest prefers this option for hedging in order to exchange traded futures since they are more customizable. Over the counter hedges are directly traded among the investment banks and airlines, and thereby associate counterparty risk that must be taken into account. Thus, most airline businesses prefer trading with 3 or 4 different banks for diversifying this risk and also to get the best possible prices.

In the United States of America, the futures for jet fuel are not available and therefore heating or crude oil futures are used by airlines to hedge the risk jet fuel purchases. As these contracts of future are dependent on an underlying commodity other than fuel of jet, basis risk is resulted from them since they are not perfectly ...