Question

United Airlines enters into a forward contract to buy (long) 20,000 barrels of jet fuel from...

United Airlines enters into a forward contract to buy (long) 20,000 barrels of jet fuel from an oil refinery on January 2021 at a forward price of $1.90 per gallon. If the spot price of jet fuel on maturity date is $2.10, what is United Airlines' payoffs from this contract?

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Answer #1

Correct Answer:  $ 168,000

Working:

Position of United Airlines = Long on forward contract at strike price = 1.90 $ per gallon

Lot size = 20,000 barrels

Spot price at maturity = $ 2.10 per gallon

Additional Information, 1 barrel = 42 gallon

Now since SPOT PRICE at maturity > FORWARD PRICE

There Exist a positive payoff.

Now Calculating,

Total Payoff = (SPOT PRICE - FORWARD PRICE) X LOT SIZE X 42

(As 1 barrel = 42 Gallons and prices are provided in per gallon )

Substituting the values,

The total payoff from this contract. = (2.10- 1.90) X 20,000 X 42

= 0.20 X 20,000 X 42 = $ 168,000

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