Answered step by step
Verified Expert Solution
Question
1 Approved Answer
An airline company expects to purchase 2 million gallons of jet fuel in 1 month and decides to use heating oil futures for hedging. Based
An airline company expects to purchase 2 million gallons of jet fuel in 1 month and decides to use heating oil futures for hedging. Based on monthly return data from the past 10 successive months, the company calculates the following standard deviations and correlations:
- Standard Deviation of the spot price of jet fuel: S = 0.03
- Standard Deviation of the heating oil futures contract price: F= 0.05
- Correlation between the spot price of jet fuel and the heating oil futures price: 1 = 0.7
- Correlation between the spot price of jet fuel and the spot price of heating: 2 = 0.6
Each heating oil contract traded by the CME Group is on 42,000 gallons of heating oil.
What should be the hedge ratio (h*) for this hedge? Round your calculation to the nearest two decimal places, i.e., 0.01.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started