Decimal places: please keep at least 4 in the calculations, 2 in the final answers.

2. An airline firm needs to purchase 10,000,000 gallons of jet fuel in one month and decides to hedge with futures contracts on heating oil. Each futures contract is on 42,000 gallons of heating oil. The spot price of jet fuel is $2.102 per gallon and the standard deviation of the change in the spot price of jet fuel over one month is estimated to be $0.045. The futures price of heating oil is $2.8349 per gallon and the standard deviation of the change in this over one month is $0.053. The coefficient of correlation between the spot price change and futures price change is 0.92 . (a) What is the minimum variance hedge ratio? (b) Should the company take a long or short futures position? (c) What is the optimal number of futures contracts when issues associated with daily settlement are not considered? (d) How can the daily settlement of futures contracts be taken into account? (Assume the daily standard deviations and correlation coefficient remain the same.)