Hedging WTI Crude Oil:
United Continental Holdings, Inc. (UAL)
Hee Joo Kim
Joyce Chung
Michael Chen
Orlando Ardila
May 8, 2012
Company Overview
 We are United Continental Holdings Inc., a leading
American airline. Fuel costs comprise over 30% of our
total operating expenses, and so we face high risks of
fluctuations in jet fuel prices.
 We will need to purchase and use jet fuel in June.
Since OTC jet fuel hedging is too expensive—and
there is a high correlation between the prices for jet
fuel and crude oil—we are looking to protect against
price increases by hedging a proportion of our fuel
consumption in WTI crude oil (CL).
Table 1. Selected Values from United Continental Holdings Inc.'s 2011 Annual Report
Year Ended
December 31, 2011
Aircraft fuel expense (in millions)
$12,375
As a percentage of total operating expenses
37%
Total fuel consumption (in millions of gallons) 4,038
Average price per gallon
$3.06
Table 2. How Projected Fuel Requirements for 2012 Were Hedged (as of December 31, 2011)
Maximum price
% of Expected Weighted Avg Price
Consumption
(per gallon)
Heating oil collars
11 % $
3.13
Heating oil call options
7
3.22
Brent crude oil collars
6
2.74
Diesel fuel collars
4
3.12
Aircraft fuel swaps
1
2.9
WTI crude oil call options
1
2.37
WTI crude oil swaps
1
2.25
Total
31 %
Minimum Price
% of Expected Weighted Avg Price
Consumption
(per gallon)
11 % $
2.52
N/A
N/A
6
1.91
4
2.35
1
2.9
N/A
N/A
1
2.25
23 %
Market View
Method:
 We used 6 different trend models to forecast spot price
for April, May and June. Trend models include
monthly crude oil price starting in January 1986.
Conclusion:
 Our models lead us to forecast that the average price of
crude oil in June 2012 will be approximately $98.94,
DOWN from the current spot price of $104.64.
Factors Considered for View
 Economic Factors
 Oil is pro-cyclical
 Expect bearish economy  decrease in demand for oil



Growing concerns regarding European Sovereign Debt Crisis
(Italy and Spain)
Slowing growth in China (8.1% in 2012Q1 – lowest since 2009)
Weak U.S. job market – 55,000 less job creations than economists expected
 Geopolitical Factors
 Easing political tensions with Iran  less supply risk


3rd largest exporter of crude oil in the world
Six Party negotiations in motion to ease EU’s oil embargo on Iran, Iran’s partial oil
embargo, and other countries’ sanctions
 Increase in U.S. domestic crude oil production to average 6.2 million barrels per
day in 2012 – highest level of production since 1998 (U.S. Energy Information
Administration, 2012)
 End of “high season” – transition to warmer weather  decrease in demand
Other Factors That Affect CL
Prices
 Natural disasters
 Pressure from speculation
 War & military action
 Changes in OEPC’s crude oil production and supply
 Increase in global demand
 New technological energy development
 Management of crude oil inventories
Further Support
 Based on the trending oil prices, we expect market oil prices to go DOWN. Our
outlook on CL prices in the next month (June 2012 delivery) is down.
 This view is generally supported by analysts and economists.
Volatility
We see that while
oil is subject to
high volatility
(and is cyclical),
implied and
historical
volatilities have
steadily
converged and
have remained
within the mid20% range in the
past few months.
Volatility Graph - Last 6 Months
Implied volatility is comparable to historical
vol (10D and 30D) at around 23%
Our View on Volatility
Implied volatility and
historical (realized)
volatility are both
around 23%..
After analyzing the
volatility graphs and
running volatility
forecasts using the
GARCH model, we
expect volatility to
remain STABLE until
June.
Risk Assumptions
 Crude Oil Contract Price (4/17/2012): $104.64
 Contract Settlement Date: 5/22/2012
 Days Remaining: 35 days
 Amount of Crude Oil Required: 150,000 barrels
UAL’s total fuel consumption in 2011 was 4.028 billion gallons
We assume fuel consumption levels will remain the same in 2012
1 barrel = 42 US gallons  converts to 96.123 million barrels
UAL hedges 2% of total fuel consumption in WTI crude oil call
options and swaps
 2% of 96.123 million barrels  2 million barrels
 We took 1/12th of this figure to assume that this project constitutes
UAL’s June fuel consumption  150,000 barrels




 Number of Barrels per Contract: 1,000 barrels/contract
 Number of Futures Contracts:
150,000
1,000
= 150 contracts
 Total Exposure Value: $15,696,000
(150,000 barrels x $104.64/barrel)
 Target Loss: $784,800 (5% of exposure value)
 Associated Loss Probability: 5% (1.65 standard deviations)

The probability of loss is set at 5% because UAL does not want more
than a 1 out of 20 chance of its loss exceeding $784,800
 Risk-free Rate: 0.23975%

US0001M – 1 month treasury bill rate for 4/17/2012
 Risk Premium: 9.47869%
Price Calculations
Expected Future Price & Upper/Lower Critical Prices
 Expected Future Price: $105.5909
𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝐹𝑢𝑡𝑢𝑟𝑒 𝑃𝑟𝑖𝑐𝑒 = 𝑆 𝑚𝑎𝑟𝑘𝑒𝑡 = 𝐹
1+ 𝑅+𝑅𝑃 ∗𝑡
1+𝑅∗𝑡
= $105.5909
 Lower Critical Price (for short exposure): $89.3016
𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑓𝑢𝑡𝑢𝑟𝑒𝑠 𝑝𝑟𝑖𝑐𝑒 ∗ 𝑒 −#
𝑡
= $89.3016
 Upper Critical Price (for short exposure): $124.8514
𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑓𝑢𝑡𝑢𝑟𝑒𝑠 𝑝𝑟𝑖𝑐𝑒 ∗ 𝑒 +#
𝑡
= $124.8514
 There is 5% chance that the underlying (CL) will be at or
above $124.8514 in 35 days.
 The associated loss relative to buying the underlying at the
current futures price of $104.64 is 19.32%.
To Satisfy Risk Limits…
 Keep
5%
19.32%
= 𝟐𝟓. 𝟖𝟗% of current unhedged position
 Hedge 1 − 0.2589 = 𝟕𝟒. 𝟏𝟏% of forward futures
 Contracts of Underlying Exposure = 150, so…
Keep 25.89% ∗ 150 = 38.835  38 𝑐𝑜𝑛𝑡𝑟𝑎𝑐𝑡𝑠
Hedge 74.11% ∗ 150 = 111.165  112 𝑐𝑜𝑛𝑡𝑟𝑎𝑐𝑡𝑠
Hedge up to 112 contracts
Value @Risk Spreadsheet
Price Value at Risk (V@R)
Today 4/17/2012
Futures price
Risk Limit
$
# s.d. V@R (e.g. 1.00)
Exposure (maturity) Date
For risk premium-adjusted V@R
Underlying
104.64 Annual price volatility (stan. dev.)
(784,800) # of contract underlying
1.65 Exposure (+/-Contracts)
Risk Premium Estimate
Notes Quick & Dirty Check
For Volatility - standard deviation information,
use the Bloomberg 250-day (regulatory) vol.
Target Loss -5.00%
BPM 9 <Currncy> HIVG <Go>
1,000
-150
5/22/2012 $ underlying
Adjustment (+/-Contracts)
=annual vo l/SQRT(12 )
9.4665
(s .d. E.g. 1% a s 1.0)
Short V@R @ price*exp(+#*sd)
$ V@R
123.2829
$ (718,744.56) $
Short upside @ price*exp(-#*sd)
$ profit
90.2053
556,505.19 $
-$15,696,000
use the Bloomberg 250-day (regulatory) vol.
111
-21
OK@ -39
$
123.2829
124.9963
124.9963
(718,744.56) $ (784,800.00) $ (784,800.00)
90.2053
556,505.19 $
89.1981
595,334.47 $
89.1981
595,334.47
Probability of doing worse
than +1.65 standard deviation
(or 124.9963) is 4.95%
50%
40%
30%
Note: Riskmetrics assumes
a zero risk premium.
20%
10%
89.198
1
89.00
124.9963
104.64
94.00
Set one maturity to 250 days
T>30 days= 35
period vol = (optional)
Own estimate mo nthly vo l*s q rt(3 5 d ays /3 0 )
Own estimate
9.4665
10.2250
10.2250
V@R Center and Conf idence Interv al
0%
84.00
32.7929
0.23975% Monthly Estimates
9.48%
(optional)
Funding Rate
Standard deviations
CL
99.00
104.00
109.00
114.00
119.00
124.00
129.00
If the graph doesn't plot,
click the X-axis and
format axis "scale" to
bracket price range.
Loss %
Keep
Hedge
Simple
Log
-19.45% -17.78%
25.7%
28.1%
74.3%
71.9%
Set no hedge & To Match "Keep" 25.7%
Probability
1 out of
with
for 1.00 s.d
15.87%
6 3.0% loss
for 1.28 s.d
10.03%
10 3.9% loss
for 1.44 s.d
for 1.65 s.d
7.49%
4.95%
13 4.3% loss
20 5.0% loss
for 2.00 s.d
for 2.33 s.d
for 3.09 s.d
2.28%
1.00%
0.100%
44 6.1% loss
100 7.2% loss
1000 9.9% loss
Check # s.d.
1.7
UAL should hedge 74.1% of its underlying CL position and
leave 25.9% of its position unhedged.
Unhedged Position
L or S (Long/Short)
F,C,or P (Forward, Call, Put)
Forward/ Strike Price
Premium
Number of contracts
$
$
$
$
$
$
$
$
$
$
$
$
$
Price
86.64
89.64
92.64
95.64
98.64
101.64
104.64
107.64
110.64
113.64
116.64
119.64
122.64
$
$
$
$
$
$
$
$
$
$
$
$
$
-150F
2,700.00
2,250.00
1,800.00
1,350.00
900.00
450.00
(450.00)
(900.00)
(1,350.00)
(1,800.00)
(2,250.00)
(2,700.00)
S
F
104.64
0.00
150
Total P/ L on barrels
$
2,700,000.00
$
2,250,000.00
$
1,800,000.00
$
1,350,000.00
$
900,000.00
$
450,000.00
$
$
(450,000.00)
$
(900,000.00)
$
(1,350,000.00)
$
(1,800,000.00)
$
(2,250,000.00)
$
(2,700,000.00)
Critical Price Loss on Position
$
(3,053,444.87)
Maximum Loss Permitted
$
(784,800.00)
Forward Hedge
The forward hedge position reflects the Value @Risk calculations, and indicates
how many forward contracts we need hedge to be within our risk limits.
L or S (Long/Short)
F,C,or P (Forward, Call, Put)
Forward/ Strike Price
Premium
Number of contracts
$
$
$
$
$
$
$
$
$
$
$
$
$
Price
86.64
89.64
92.64
95.64
98.64
101.64
104.64
107.64
110.64
113.64
116.64
119.64
122.64
$
$
$
$
$
$
$
$
$
$
$
$
$
-150F
2,700.00
2,250.00
1,800.00
1,350.00
900.00
450.00
(450.00)
(900.00)
(1,350.00)
(1,800.00)
(2,250.00)
(2,700.00)
$
$
$
$
$
$
$
$
$
$
$
$
$
S
F
104.64
0.00
150
+112F
(2,016.00)
(1,680.00)
(1,344.00)
(1,008.00)
(672.00)
(336.00)
336.00
672.00
1,008.00
1,344.00
1,680.00
2,016.00
L
F
104.64
0.00
112
-150F+112F
$ 684.00
$ 570.00
$ 456.00
$ 342.00
$ 228.00
$ 114.00
$
$ (114.00)
$ (228.00)
$ (342.00)
$ (456.00)
$ (570.00)
$ (684.00)
Total P/L on barrels
$
684,000.00
$
570,000.00
$
456,000.00
$
342,000.00
$
228,000.00
$
114,000.00
$
$
(114,000.00)
$
(228,000.00)
$
(342,000.00)
$
(456,000.00)
$
(570,000.00)
$
(684,000.00)
Critical Price Loss on Position
$
(773,539.37)
Maximum Loss Permitted
$
(784,800.00)
OK - Within Risk Parameters
Market View & Potential Strategies
The matrix below indicates both components of our market view (highlighted in
darker blue). The alternative market views UAL can consider are highlighted in the
lighter blue. For each view, we recommend an appropriate option strategy for UAL.
Direction vs.
Market View
Unsure
View = Vol up
(options cheap)
Up
(forward
cheap)
? or Stable
(forward
priced fairly)
Level of Confidence
=Market
View = Vol Stable
(options priced fairly)
Sure
View = Vol down
(options expensive)
Forward Hedge
-150F+112F
Synthetic Short Straddle
-150F+76F-148P
Synthetic Short Strangle
-150F+72F-77𝑃𝑂𝑇𝑀 -77𝑃𝐼𝑇𝑀
Down
(forward rich)
Synthetic Long Put
-150F+150C
Synthetic Long 𝑷𝒖𝒕𝑰𝑻𝑴
-121F+121𝐶𝑂𝑇𝑀
Synthetic Bear Spread
-150F+150𝐶𝑂𝑇𝑀 -150𝑃𝑂𝑇𝑀
-136F+136𝐶𝑂𝑇𝑀 -136𝑃𝑂𝑇𝑀
Synthetic Short Call
-150F+99F-52P
Call/Put Market Prices
Calls
In-at-out of money Strike Price Price Quote
More OTM
$ 112.00 $
2.30
OTM
$ 107.00 $
4.05
ATM
$ 104.50 $
5.35
ITM
$ 102.00 $
7.15
More ITM
$ 97.00 $
10.18
Data as of April 17, 2012
Puts
Strike Price Price Quote
$ 97.00 $
2.50
$ 102.00 $
3.90
$ 104.50 $
4.90
$ 107.00 $
6.30
$ 112.00 $
9.31
Synthetic Bear Spread
View: Limited down, Worry big up
Purpose: Trading, Insurance, Income
The synthetic bear spread best addresses our view of a limited down and
concern for a big up. In this position, we forgo potential upside gains to
protect our company from the ramifications of price increases.
L or S (Long/Short)
F,C,or P (Forward, Call, Put)
Forward/ Strike Price
Premium
Number of contracts
$
$
$
$
$
$
$
$
$
$
$
$
$
Price
86.64
89.64
92.64
95.64
98.64
101.64
104.64
107.64
110.64
113.64
116.64
119.64
122.64
$
$
$
$
$
$
$
$
$
$
$
$
$
-150F
2,700.00
2,250.00
1,800.00
1,350.00
900.00
450.00
(450.00)
(900.00)
(1,350.00)
(1,800.00)
(2,250.00)
(2,700.00)
+150Cotm
$ (607.50)
$ (607.50)
$ (607.50)
$ (607.50)
$ (607.50)
$ (607.50)
$ (607.50)
$ (511.50)
$ (61.50)
$ 388.50
$ 838.50
$ 1,288.50
$ 1,738.50
S
F
104.64
0.00
150
L
C
107
4.05
150
-150Potm
$ (1,719.00)
$ (1,269.00)
$ (819.00)
$ (369.00)
$
81.00
$ 531.00
$ 585.00
$ 585.00
$ 585.00
$ 585.00
$ 585.00
$ 585.00
$ 585.00
-150F+150C-150P
$
373.50
$
373.50
$
373.50
$
373.50
$
373.50
$
373.50
$
(22.50)
$
(376.50)
$
(376.50)
$
(376.50)
$
(376.50)
$
(376.50)
$
(376.50)
S
P
102.00
3.90
150
Total P/L on barrels
$
373,500.00
$
373,500.00
$
373,500.00
$
373,500.00
$
373,500.00
$
373,500.00
$
(22,500.00)
$
(376,500.00)
$
(376,500.00)
$
(376,500.00)
$
(376,500.00)
$
(376,500.00)
$
(376,500.00)
Maximum Loss on Position
$
(376,500.00)
Maximum Loss Permitted
$
(784,800.00)
OK - Within Risk Parameters
Synthetic Bear Spread
(more OTM call)
View: Direction Down, Worried about big up (not as much 1st bull-spread)
Purpose: Trading, Insurance, Income
Preference over the other bull-spread if slightly more biased in the down
direction – we can reap higher gains when prices fall at the cost of
decreasing our protection against possible increase in price).
L or S (Long/Short)
F,C,or P (Forward, Call, Put)
Forward/ Strike Price
Premium
Number of contracts
$
$
$
$
$
$
$
$
$
$
$
$
$
Price
86.64
89.64
92.64
95.64
98.64
101.64
104.64
107.64
110.64
113.64
116.64
119.64
122.64
$
$
$
$
$
$
$
$
$
$
$
$
$
-136F
2,448.00
2,040.00
1,632.00
1,224.00
816.00
408.00
(408.00)
(816.00)
(1,224.00)
(1,632.00)
(2,040.00)
(2,448.00)
+136Cotm
$ (312.80)
$ (312.80)
$ (312.80)
$ (312.80)
$ (312.80)
$ (312.80)
$ (312.80)
$ (312.80)
$ (312.80)
$ (89.76)
$ 318.24
$ 726.24
$ 1,134.24
S
F
104.64
0.00
136
-136Potm
$ (1,558.56)
$ (1,150.56)
$ (742.56)
$ (334.56)
$
73.44
$ 481.44
$ 530.40
$ 530.40
$ 530.40
$ 530.40
$ 530.40
$ 530.40
$ 530.40
L
C
112
2.30
136
-136F+136C-136P
$
576.64
$
576.64
$
576.64
$
576.64
$
576.64
$
576.64
$
217.60
$
(190.40)
$
(598.40)
$
(783.36)
$
(783.36)
$
(783.36)
$
(783.36)
S
P
102.00
3.90
136
Total P/L on barrels
$
576,640.00
$
576,640.00
$
576,640.00
$
576,640.00
$
576,640.00
$
576,640.00
$
217,600.00
$
(190,400.00)
$
(598,400.00)
$
(783,360.00)
$
(783,360.00)
$
(783,360.00)
$
(783,360.00)
Maximum Loss on Position
$
(783,360.00)
Maximum Loss Permitted
$
(784,800.00)
OK - Within Risk Parameters
Synthetic Short Straddle
View: Stable, Neutral Direction Purpose: Trade Volatility, Income
We assume prices will more-or-less remain the same. We earn little
income (i.e. premium) when prices have little to no movement in
either direction. The range of prices is narrower than in a short
strangle.
L or S (Long/Short)
S
L
S
F,C,or P (Forward, Call, Put)
Forward/ Strike Price
Premium
Number of contracts
$
$
$
$
$
$
$
$
$
$
$
$
$
Price
86.64
89.64
92.64
95.64
98.64
101.64
104.64
107.64
110.64
113.64
116.64
119.64
122.64
$
$
$
$
$
$
$
$
$
$
$
$
$
-150F
2,700.00
2,250.00
1,800.00
1,350.00
900.00
450.00
(450.00)
(900.00)
(1,350.00)
(1,800.00)
(2,250.00)
(2,700.00)
$
$
$
$
$
$
$
$
$
$
$
$
$
F
104.64
0.00
150
+76F
(1,368.00)
(1,140.00)
(912.00)
(684.00)
(456.00)
(228.00)
228.00
456.00
684.00
912.00
1,140.00
1,368.00
F
$ 104.64
0.00
76
P
$ 104.50
4.90
148
-148P
-74F+148P Total P/L on barrels
$ (1,918.08) $ (586.08) $
(586,080.00)
$ (1,474.08) $ (364.08) $
(364,080.00)
$ (1,030.08) $ (142.08) $
(142,080.00)
$ (586.08) $
79.92 $
79,920.00
$ (142.08) $ 301.92 $
301,920.00
$ 301.92 $ 523.92 $
523,920.00
$ 725.20 $ 725.20 $
725,200.00
$ 725.20 $ 503.20 $
503,200.00
$ 725.20 $ 281.20 $
281,200.00
$ 725.20 $
59.20 $
59,200.00
$ 725.20 $ (162.80) $
(162,800.00)
$ 725.20 $ (384.80) $
(384,800.00)
$ 725.20 $ (606.80) $
(606,800.00)
Critical Price Loss on Position
$
(781,166.14)
Maximum Loss Permitted
$
(784,800.00)
OK - Within Risk Parameters
Synthetic Short Strangle
View: Stable, Neutral Direction Purpose: Trade Vol, Insurance, Income
We believe there will be little to no price movement (but more than short
straddle position). We have a limited gain upside for a wider range of
prices than we would in a straddle.
L or S (Long/Short)
F,C,or P (Forward, Call, Put)
Forward/ Strike Price
Premium
Number of contracts
$
$
$
$
$
$
$
$
$
$
$
$
$
Price
86.64
89.64
92.64
95.64
98.64
101.64
104.64
107.64
110.64
113.64
116.64
119.64
122.64
-150F
$ 2,700.00
$ 2,250.00
$ 1,800.00
$ 1,350.00
$ 900.00
$ 450.00
$
$ (450.00)
$ (900.00)
$ (1,350.00)
$ (1,800.00)
$ (2,250.00)
$ (2,700.00)
+73F
$ (1,314.00)
$ (1,095.00)
$ (876.00)
$ (657.00)
$ (438.00)
$ (219.00)
$
$ 219.00
$ 438.00
$ 657.00
$ 876.00
$ 1,095.00
$ 1,314.00
S
F
104.64
0.00
150
-77Potm
$ (882.42)
$ (651.42)
$ (420.42)
$ (189.42)
$ 41.58
$ 272.58
$ 300.30
$ 300.30
$ 300.30
$ 300.30
$ 300.30
$ 300.30
$ 300.30
L
F
104.64
0.00
73
-77Pitm
$ (1,082.62)
$ (851.62)
$ (620.62)
$ (389.62)
$ (158.62)
$ 72.38
$ 303.38
$ 485.10
$ 485.10
$ 485.10
$ 485.10
$ 485.10
$ 485.10
S
P
102
3.90
77
-77F-77P+77P
$
(579.04)
$
(348.04)
$
(117.04)
$
113.96
$
344.96
$
575.96
$
603.68
$
554.40
$
323.40
$
92.40
$
(138.60)
$
(369.60)
$
(600.60)
S
P
107
6.30
77
Total P/L on barrels
$
(579,040.00)
$
(348,040.00)
$
(117,040.00)
$
113,960.00
$
344,960.00
$
575,960.00
$
603,680.00
$
554,400.00
$
323,400.00
$
92,400.00
$
(138,600.00)
$
(369,600.00)
$
(600,600.00)
Critical Price Loss on Position
$
(782,035.04)
Maximum Loss Permitted
$
(784,800.00)
OK - Within Risk Parameters
Synthetic Short Call
View: Stable, Not Up
Purpose: Trade, Income
This position results in unlimited losses if prices go up (but less than –
F position). If prices go down as we expect, we gain limited upside.
L or S (Long/Short)
F,C,or P (Forward, Call, Put)
Forward/ Strike Price
Premium
Number of contracts
$
$
$
$
$
$
$
$
$
$
$
$
$
Price
86.64
89.64
92.64
95.64
98.64
101.64
104.64
107.64
110.64
113.64
116.64
119.64
122.64
$
$
$
$
$
$
$
$
$
$
$
$
$
-150F
2,700.00
2,250.00
1,800.00
1,350.00
900.00
450.00
(450.00)
(900.00)
(1,350.00)
(1,800.00)
(2,250.00)
(2,700.00)
$
$
$
$
$
$
$
$
$
$
$
$
$
S
F
104.64
0.00
150
+99F
(1,782.00)
(1,485.00)
(1,188.00)
(891.00)
(594.00)
(297.00)
297.00
594.00
891.00
1,188.00
1,485.00
1,782.00
$
$
$
$
$
$
$
$
$
$
$
$
$
-52P
(673.92)
(517.92)
(361.92)
(205.92)
(49.92)
106.08
254.80
254.80
254.80
254.80
254.80
254.80
254.80
L
F
104.64
0.00
99
S
P
104.5
4.90
52
-51F-52P Total P/L on barrels
$ 244.08 $
244,080.00
$ 247.08 $
247,080.00
$ 250.08 $
250,080.00
$ 253.08 $
253,080.00
$ 256.08 $
256,080.00
$ 259.08 $
259,080.00
$ 254.80 $
254,800.00
$ 101.80 $
101,800.00
$ (51.20) $
(51,200.00)
$ (204.20) $
(204,200.00)
$ (357.20) $
(357,200.00)
$ (510.20) $
(510,200.00)
$ (663.20) $
(663,200.00)
Critical Price Loss on Position
$
(783,371.26)
Maximum Loss Permitted
$
(784,800.00)
OK - Within Risk Parameters
Synthetic Long Put
View: Direction Down, but Unsure
Purposes: Trading, Insurance
We would hold this position if our view was the prices were going to go
down, but we want to protect ourselves from potential losses if prices go
up instead.
L or S (Long/Short)
S
L
F,C,or P (Forward, Call, Put)
Forward/ Strike Price
Premium
Number of contracts
$
$
$
$
$
$
$
$
$
$
$
$
$
Price
86.64
89.64
92.64
95.64
98.64
101.64
104.64
107.64
110.64
113.64
116.64
119.64
122.64
$
$
$
$
$
$
$
$
$
$
$
$
$
-150F
2,700.00
2,250.00
1,800.00
1,350.00
900.00
450.00
(450.00)
(900.00)
(1,350.00)
(1,800.00)
(2,250.00)
(2,700.00)
F
104.64
0.00
150
C
104.5
5.35
150
+150C -150F+150C
$ (802.50) $ 1,897.50
$ (802.50) $ 1,447.50
$ (802.50) $ 997.50
$ (802.50) $ 547.50
$ (802.50) $
97.50
$ (802.50) $ (352.50)
$ (781.50) $ (781.50)
$ (331.50) $ (781.50)
$ 118.50 $ (781.50)
$ 568.50 $ (781.50)
$ 1,018.50 $ (781.50)
$ 1,468.50 $ (781.50)
$ 1,918.50 $ (781.50)
Total P/L on barrels
$
1,897,500.00
$
1,447,500.00
$
997,500.00
$
547,500.00
$
97,500.00
$
(352,500.00)
$
(781,500.00)
$
(781,500.00)
$
(781,500.00)
$
(781,500.00)
$
(781,500.00)
$
(781,500.00)
$
(781,500.00)
Critical Price Loss on Position
$
(781,500.00)
Maximum Loss Permitted
$
(784,800.00)
OK - Within Risk Parameters
Synthetic Long Put (ITM)
View: Direction Down, but Unsure
Purposes: Trading, Insurance
We realize unlimited gains if prices go down, but we will forgo potential gains
to protect ourselves from an increase in volatility (cap losses at higher price
level than an ATM synthetic long put).
L or S (Long/Short)
F,C,or P (Forward, Call, Put)
Forward/ Strike Price
Premium
Number of contracts
$
$
$
$
$
$
$
$
$
$
$
$
$
Price
86.64
89.64
92.64
95.64
98.64
101.64
104.64
107.64
110.64
113.64
116.64
119.64
122.64
$
$
$
$
$
$
$
$
$
$
$
$
$
-121F
2,178.00
1,815.00
1,452.00
1,089.00
726.00
363.00
(363.00)
(726.00)
(1,089.00)
(1,452.00)
(1,815.00)
(2,178.00)
S
F
104.64
0.00
121
L
C
107
4.05
121
+121C
-121F+121C
$ (490.05) $ 1,687.95
$ (490.05) $ 1,324.95
$ (490.05) $
961.95
$ (490.05) $
598.95
$ (490.05) $
235.95
$ (490.05) $ (127.05)
$ (490.05) $ (490.05)
$ (412.61) $ (775.61)
$
(49.61) $ (775.61)
$ 313.39 $ (775.61)
$ 676.39 $ (775.61)
$ 1,039.39 $ (775.61)
$ 1,402.39 $ (775.61)
Total P/L on barrels
$
1,687,950.00
$
1,324,950.00
$
961,950.00
$
598,950.00
$
235,950.00
$
(127,050.00)
$
(490,050.00)
$
(775,610.00)
$
(775,610.00)
$
(775,610.00)
$
(775,610.00)
$
(775,610.00)
$
(775,610.00)
Critical Price Loss on Position
$
(775,610.00)
Maximum Loss Permitted
$
(784,800.00)
OK - Within Risk Parameters
Recommended Strategy:
Synthetic Bear Spread
Recommended Strategy:
Synthetic Bear Spread
 UAL should use a SYNTHETIC BEAR SPREAD given that
their market view of crude oil is DOWN and STABLE.
 In our initial strategy suggestions, the two synthetic bull
spreads we considered were:
-150F + 150 𝐶𝑂𝑇𝑀 – 150 𝑃𝑂𝑇𝑀


𝐶𝑂𝑇𝑀 strike price of $107.00
𝑃𝑂𝑇𝑀 strike price of $102
-136F + 136 𝐶𝑂𝑇𝑀 – 136 𝑃𝑂𝑇𝑀


𝐶𝑂𝑇𝑀 strike price of $112.00
𝑃𝑂𝑇𝑀 strike price of $102
 The loss at the upper critical price level associated with a
standard deviation of 1.65 and a target loss of 5% is :
Maximum Loss on Position
$
(783,360.00)
Maximum Loss Permitted
$
(784,800.00)
OK - Within Risk Parameters
 This position gives us protection from in the event of
rising prices, but allows us to get higher gains when
prices has limited down. This matches our views and our
projections on future spot prices and volatility.
 As seen in the graph, varying strike prices can adapt
the hedging position to better fit the company’s
market views on direction and volatility.