Question
An airline wants to hedge the price risk of purchasing three million gallons of jet fuel. The jet fuel futures contract liquidity is low, so
An airline wants to hedge the price risk of purchasing three million gallons of jet fuel. The jet fuel futures contract liquidity is low, so the airline decides to cross-hedge using the heating oil futures contract. The minimum variance hedge ratio for the spot price of jet fuel and the heating oil futures contract is 1.12 and the size of the heating oil futures contract is 42,000 gallons. The spot price of jet fuel is $3.03 per gallon and the futures price for heating oil is $2.67 per gallon. If the airline wants to tail the hedge, what is the optimal number of heating oil futures contracts to use?
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