Risks for Domestic Airlines Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Risks for Domestic Airlines

Question 1

The earnings before tax have been calculated for the month of September 2015 for Jetsafe as shown in the excel spreadsheet. The new number of flights for the month of September is 522 and based upon the average revenue per flight of $ 0.04 million the total revenue has been computed. Based upon the current USD price per metric ton for the kerosene oil, the variable costs have been calculated since these costs vary with the number of the total flights in the month. After deducting the total variable costs and the fixed costs from the sales, the profit before tax has been computed in USD which is $ 2.83 million. Using the current spot exchange rate of 0.6972 USD per AUD, the earnings before tax have been calculated which are AUD 4.05 million.

Question 2

The volatilities and the mean returns for the Jet kerosene returns in USD and AUD/USD returns have been calculated as shown in the excel spreadsheet. One thing to note here is that in the initial data set, the USD/AUD exchange rate has been provided however, in this question we are required to calculate the volatilities and the mean returns for the AUD/USD exchange rates. Therefore, using the data sets the AUD/USD exchange rate has been computed and then its log returns have been calculated and after that the volatilities and the mean returns for the AUD/USD returns have been calculated as shown in the excel spreadsheet.

Question 3

Assuming the normality of the returns and using the mean and standard deviations for jet kerosene returns from the previous questions, the probability that the jet kerosene returns in USD would be lower than -23% is 1.19%. The calculation could be seen in the excel spreadsheet.

Question 4

Using the empirical data provided the actual probability that the returns for the jet kerosene in USD would be lower than -23% is 32.36%. This is quite high as compared to the probability calculated in the previous question. This would have a lot of implications on the part of the management. This shows that the management is exposed to increased price risk of the jet kerosene in USD and that it is going to have a negative impact upon the profitability of the firm. The management of the company needs to make use of appropriate hedging techniques in order to lock in the jet kerosene USD prices so that the cash flows of Jet Safe Company and consistent.

Question 5

The correlation between the Jet kerosene returns and the AUD/USD exchange rate has been calculated in the excel spreadsheet, which is found to be -28.91%. This shows a weak but a negative relationship between the prices of jet kerosene in dollars and the AUD/USD exchange rate movements. This implies that as the AUD/USD exchange rate appreciates in value then the company will have to pay few AUD’s in order to buy the jet kerosene in USD and the situation would be favorable for the company. However, if the exchange rate depreciates then the company will have to pay more AUD$ to pay for the jet kerosene cost in USD. This shows that the appreciation/depreciation exchange rate has a negative relationship with the cost of the jet kerosene in USD. The current AUD/USD exchange rate is 1.43431 AUD/USD and if now the exchange rate moves up, which means depreciates, then the company would have to pay increased cost for jet kerosene in USD.

Question 6

The simulation models for the monthly prices of the jet fuels and the AUD/USD exchange rate have been generated in the excel spreadsheet which is active. The simulation models have been created on the basis of the provided volatilities, correlation and assuming a risk free rate of 1%. The earnings for each of the month on average for all the 1000 paths have been calculated then as shown in the excel spreadsheet.

Based on the monthly earnings, the total earnings for the year have been computed as shown in the excel spreadsheet. Moreover, among the 10,000 Monte Carlo Simulations which had been generated each time by pressing F9, 10 different samples for the average total earnings have been calculated and based upon these 12 observations or samples, the statistical values as provided in the given table have been computed. All the calculations could be seen in the excel spreadsheet. ..........................

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