Frontier Airlines hedged the cost of jet fuel by purchasing options that allowed the airline to buy fuel at a fixed price for 2 years. The savings in fuel costs were $140,000 in month 1, $141,400 in month 2, and amounts increasing by 1% per month through the 2-year option period. What was the present worth of the savings at an interest rate of 18% per year, compounded monthly?
What will be an ideal response?
PP = month; CP = month; use i = 1.5% per month; find P for g = 1%
P = 140,000[1 – (1.01/1.015)24]/(0.015 – 0.01)
= 140,000(22.35297)
= $3,129,416
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