2 a- Estimate and interpret the minimum variance hedge ratio for each of the future commodity. Use the OLS method and comment on the significance of the results.

For the HO1 Commodity, the minimum variance hedge ratio is; h*=0.875547.57476.20527 h*=1.06876

For the CO1 Commodity, the minimum variance hedge ratio is; h*=0.775667.57472.3205 h*=2.53195

2 b- Discuss whether differences in the hedge ratio between the two commodities will have any effect on the effectiveness of the hedge.

2 c- Recommend a convenient hedging strategy to the CFO using the data provided and explain the corresponding hedging position.

2 d- What are the potential factors that may weaken your suggested strategy. Discuss

j K L M N P Q R s T U V X Variable 1 Line Fit Plot 50 40 30 20 10 Predicted Y A B D E F H 1 1 SUMMARY OUTPUT HO1 COMMODITY 2 3 Regression Statistics 4 Multiple R 0.87554535 5 R Square 0.76657966 6 Adjusted R S 0.76537023 7 Standard Erro 3.66907638 8 Observations 195 9 9 10 ANOVA 11 df SS MS F Significance F 12 Regression 1 8532.75759 8532.75759 633.834542 6.9347E-63 13 Residual 193 2598.18944 13.4621215 14 Total 194 11130.947 15 16 Coefficients itandard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% 17 Intercept -0.0299619 0.26338498 -0.113757 0.90954868 -0.5494444 0.48952065 -0.5494444 0.48952065 18 X Variable 1 1.06876641 0.04245168 25.1760708 6.9347E-63 0.98503762 1.15249519 0.98503762 1.15249519 19 20 21 22 RESIDUAL OUTPUT 23 24 Observation Predicted Y Residuals 25 1 -5.2241666 4.6358334 26 2 -12.62003 0.84003017 27 3 6.53226386 -1.3622639 28 4 6.31851058 4.83148942 29 5 0.38685702 0.14314298 30 6 1.07086752 0.45913248 31 7 4.7111588 -0.6688412 32 8 2.71676779 -2.0267678 33 9 11.7371563 -2.2271563 34 10 6.02994365 -1.1099437 35 11 2.22513524 -0.3651352 36 12 4.4332795 0.81327949 37 13 7.1051955 -1.0148045 -25 -20 -15 -10 10 15 20 25 ar -10 -20 -30 X Variable 1 JETINYPR Index HO1 Comdty CO1 Comdty Sheet2 Sheet1 Sheet4 Sheet3 + j K L M N P Q R s T V X Variable 1 Line Fit Plot 50 40 30 20 A B D E F H 1 1 SUMMARY OUTPUT C01 COMMODITY 2 3 Regression Statistics 4 Multiple R 0.77566276 5 R Square 0.60165272 6 Adjusted R S 0.59958875 7 Standard Erro 4.79312031 8 Observations 195 9 9 10 ANOVA 11 df SS MS F Significance F 12 Regression 1 6696.96459 6696.96459 291.501869 1.9622E-40 13 Residual 193 4433.98244 22.9740023 14 Total 194 11130.947 15 16 Coefficients itandard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% 17 Intercept 0.11111107 0.34375321 0.3232292 0.74687161 -0.5668843 0.78910641 -0.5668843 0.78910641 18 X Variable 1 2.53200733 0.14830107 17.0734258 1.9622E-40 2.23950843 2.82450623 2.23950843 2.82450623 19 20 21 22 RESIDUAL OUTPUT 23 24 Observation Predicted Y Residuals 25 1 -9.3332763 -0.5267237 26 2 -11.561443 -0.2185573 27 3 8.31481483 -3.1448148 28 4 6.59304985 4.55695015 29 5 -1.6106539 2.14065391 30 6 -1.6612941 3.19129406 31 7 -0.7750915 4.6049085 32 8 5.4030064 -4.7130064 33 9 9.27697762 0.23302238 34 10 4.33956332 0.58043668 35 11 2.16203701 -0.302037 36 12 -1.8132145 -1.8067855 37 13 4.3705419 -3.7494581 10 Y Predicted Y -10 -8 -6 4 8 -10 -20 -30 X Variable 1 JETINYPR Index HO1 Comdty CO1 Comdty Sheet2 Sheet1 Sheet4 heet Sheet3 + j K L M N P Q R s T U V X Variable 1 Line Fit Plot 50 40 30 20 10 Predicted Y A B D E F H 1 1 SUMMARY OUTPUT HO1 COMMODITY 2 3 Regression Statistics 4 Multiple R 0.87554535 5 R Square 0.76657966 6 Adjusted R S 0.76537023 7 Standard Erro 3.66907638 8 Observations 195 9 9 10 ANOVA 11 df SS MS F Significance F 12 Regression 1 8532.75759 8532.75759 633.834542 6.9347E-63 13 Residual 193 2598.18944 13.4621215 14 Total 194 11130.947 15 16 Coefficients itandard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% 17 Intercept -0.0299619 0.26338498 -0.113757 0.90954868 -0.5494444 0.48952065 -0.5494444 0.48952065 18 X Variable 1 1.06876641 0.04245168 25.1760708 6.9347E-63 0.98503762 1.15249519 0.98503762 1.15249519 19 20 21 22 RESIDUAL OUTPUT 23 24 Observation Predicted Y Residuals 25 1 -5.2241666 4.6358334 26 2 -12.62003 0.84003017 27 3 6.53226386 -1.3622639 28 4 6.31851058 4.83148942 29 5 0.38685702 0.14314298 30 6 1.07086752 0.45913248 31 7 4.7111588 -0.6688412 32 8 2.71676779 -2.0267678 33 9 11.7371563 -2.2271563 34 10 6.02994365 -1.1099437 35 11 2.22513524 -0.3651352 36 12 4.4332795 0.81327949 37 13 7.1051955 -1.0148045 -25 -20 -15 -10 10 15 20 25 ar -10 -20 -30 X Variable 1 JETINYPR Index HO1 Comdty CO1 Comdty Sheet2 Sheet1 Sheet4 Sheet3 + j K L M N P Q R s T V X Variable 1 Line Fit Plot 50 40 30 20 A B D E F H 1 1 SUMMARY OUTPUT C01 COMMODITY 2 3 Regression Statistics 4 Multiple R 0.77566276 5 R Square 0.60165272 6 Adjusted R S 0.59958875 7 Standard Erro 4.79312031 8 Observations 195 9 9 10 ANOVA 11 df SS MS F Significance F 12 Regression 1 6696.96459 6696.96459 291.501869 1.9622E-40 13 Residual 193 4433.98244 22.9740023 14 Total 194 11130.947 15 16 Coefficients itandard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% 17 Intercept 0.11111107 0.34375321 0.3232292 0.74687161 -0.5668843 0.78910641 -0.5668843 0.78910641 18 X Variable 1 2.53200733 0.14830107 17.0734258 1.9622E-40 2.23950843 2.82450623 2.23950843 2.82450623 19 20 21 22 RESIDUAL OUTPUT 23 24 Observation Predicted Y Residuals 25 1 -9.3332763 -0.5267237 26 2 -11.561443 -0.2185573 27 3 8.31481483 -3.1448148 28 4 6.59304985 4.55695015 29 5 -1.6106539 2.14065391 30 6 -1.6612941 3.19129406 31 7 -0.7750915 4.6049085 32 8 5.4030064 -4.7130064 33 9 9.27697762 0.23302238 34 10 4.33956332 0.58043668 35 11 2.16203701 -0.302037 36 12 -1.8132145 -1.8067855 37 13 4.3705419 -3.7494581 10 Y Predicted Y -10 -8 -6 4 8 -10 -20 -30 X Variable 1 JETINYPR Index HO1 Comdty CO1 Comdty Sheet2 Sheet1 Sheet4 heet Sheet3 +