Question
1. Your friend offers you the opportunity to make $10.00 if you roll a die and it lands on a 1. If it does not
1. Your friend offers you the opportunity to make $10.00 if you roll a die and it lands on a 1. If it does not land on 1, then you owe him $3.00. What is the expected value of this bet? Round to the nearest 0.01.
2. British Airways would like to cross-hedge their jetfuel costs using oil futures. One oil futures contract delivers 1,000 barrels of oil and 1 barrel of oil holds 42 gallons. Every day, British Airways offers flights from Miami, FL to Athens, Greece. This flight requires 36,000 gallons of fuel (1 gallon of fuel per second!). The correlation between jet fuel and oil is 0.90. The standard deviation of jet fuel and oil futures prices is 0.20 and 0.40, respectively. How many oil futures contracts should British Airways purchase to hedge their jet fuel costs for 1 year worth of flights? Round to the nearest whole number.
3. The 4-month forward price on the Russell 2000 index is 5,500. The index is currently trading at 5,430. What is the annualized forward premium? Round to the nearest 0.01, in percentage terms?
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