4. QT has a network of 150 gasoline outlets throughout the central United States. At any ne time, the company has 1.125 million gallons of gasoline inventory. Derek Larkin has suggested that QT hedge the risk of its gasoline inventories.

a) Derek estimates the following relationship between spot (St) and futures (Ft) prices using the nearby 42000-gallon unleaded regular gasoline contract: St = + Ft + t. If estimate of = 0.5231 and = 0.9217 and R2=0.88, what should QT do to hedge its inventory price risk?

b) Derek also estimated the same relationship using the nearby 42000-gallon No. 2 heating oil futures contract with the following results: = 0.7261 and = 0.6378 and R2=0.55. Compare the results from the two regressions and cheese the contract that would be the most appropriate.