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Alaska Airlines needs to buy 4 5 0 , 0 0 0 barrels of jet fuel for its ongoing operations. The airline plans to buy
Alaska Airlines needs to buy barrels of jet fuel for its ongoing operations.
The airline plans to buy the jet fuel in the spot market six months from today and wants to hedge
its risk using futures on unleaded gasoline. The current futures price is $ per gallon and the
size of one futures contract is gallons, which equals barrels. A financial analyst at
the airline has calculated a beta equal to To calculate the beta, the analyst used a linear
regression of jet fuel price changes per barrel against gasoline futures price changes per gallon.
The airline's target beta is zero.
Should the airline go long or go short to hedge? How many futures contracts should the airline
use?
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