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Principles of Finance

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Hedging at Southwest Airlines

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Jet fuel costs represent a major expense for airlines. Southwest Airlines has been known as the most aggressive airline when it comes to hedging the risk of jet fuel cost volatility. In this interview, the CEO of Southwest Airlines, Gary Kelly, discusses crude oil prices in the spring of 2012 and the impact on Southwest Airlines.

1 .
How volatile are oil prices, and how large of an impact does that volatility have on the cost structure of an airline?
2 .
Gary Kelly states that he sees fuel prices as the largest single business risk Southwest Airlines faces and that hedging that risk has become more expensive. Why do you think it became more expensive for Southwest Airlines to hedge this risk in 2012?

BMW in the United States

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While the name BMW may sound German, a significant amount of BMW’s production occurs outside of Germany. Watch this video to learn about this international activity of BMW.

3 .
In the video, the potential car buyer is concerned about the impact of the value of the euro on the price of the BMW. Why, if he is paying for the car in US dollars, do you think that he is impacted by the currency exchange rate?
4 .
How do you think opening plants in the United States, and in other parts of the world, provides a currency hedge for BMW?
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