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Did I do this problem correctly? Also having trouble with the second part of Q4 Q3: Airline will purchase 1.4 million gallons of jet fuel
Did I do this problem correctly? Also having trouble with the second part of Q4
Q3: Airline will purchase 1.4 million gallons of jet fuel in two months and hedges using heating oil futures. Each heating oil contract traded is on 39,000 gallons of heating oil. From historical data Op =0.0308, 03=0.0233, and p= 0.912. What is the optimal number of contracts? _optimal hedge ratio*size of the position being hedged Answer: Optimal number of contracts = ? contract size per contract OS h =P P OF h* = 0.912 * (0.0233 / 0.0308) = 0.6899 (0.6899 * 1,400,000) / 39,000 = 24.766 Q4: The standard deviation of monthly changes in the spot price of live cattle is (in cents per pound) 1.15 os. The standard deviation of monthly changes in the futures price of live cattle for the closest contract is 1.33 ge. The correlation between the futures price changes and the spot price changes is 0.74 p. It is now October 15. A beef producer is committed to purchasing 34,000 pounds of live cattle on November 15. The producer wants to use the December live- cattle futures contracts to hedge its risk. Each contract is for the delivery of 5,440 pounds of cattle. (1) What is the hedge ratio? Answer: h*= 0.74*(1.15/1.33) = 0.6398 7 (2) Should the beef producer take a long or short futures position? Answer: (3) What is the optimal number of futures contracts
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