Question
Airlines use jet fuel as an input to production. Southwest Airlines is considering using crude oil future or gasoline futures to hedge the price of
Airlines use jet fuel as an input to production. Southwest Airlines is considering using crude oil future or gasoline futures to hedge the price of jet fuel in one month. It runs a regression of the change in jet fuel prices on the change in crude oil prices. The R-squared from the regression is 20%. Next, it runs a regression of the change in jet fuel prices on the change in gasoline prices. The R-squared from the regression is 30%. Based on the available information, which of the two hedging instruments - crude oil futures or gasoline futures - would be a more effective hedge for jet fuel prices?
Crude oil futures are more effective.
Gasoline futures are more effective.
Crude oil and gasoline are equally effective.
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