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).

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 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 $

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 3 rd 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 mid- 20% 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): $ 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 billion gallons We assume fuel consumption levels will remain the same in barrel = 42 US gallons  converts to million barrels UAL hedges 2% of total fuel consumption in WTI crude oil call options and swaps 2% of million barrels  2 million barrels We took 1/12 th of this figure to assume that this project constitutes UAL’s June fuel consumption  150,000 barrels

Price Calculations Expected Future Price & Upper/Lower Critical Prices

To Satisfy Risk Limits…

Spreadsheet UAL should hedge 74.1% of its underlying CL position and leave 25.9% of its position unhedged.

Unhedged Position

Forward Hedge The forward hedge position reflects the calculations, and indicates how many forward contracts we need hedge to be within our risk limits.

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.

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.

Synthetic Bear Spread (more OTM call) View: Direction Down, Worried about big up (not as much 1 st 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).

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.

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.

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.

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.

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).

Recommended Strategy: Synthetic Bear Spread

The loss at the upper critical price level associated with a standard deviation of 1.65 and a target loss of 5% is : 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.