{ , it all 97% 7:13 PM EXAMPLE: Minimum Variance Hedging and American Airlines American Airlines believes that it will need to buy 840,000 gallons of jet fuel in 3 months. The standard deviation of the change in price per gallon of jet fuel over a-3 month period is calculated as 0.032. The company chooses to hedge by taking a position in futures contracts on heating ail. The standard deviation of the change in the futures price over a 3-month period is 0.040 The coefficient of correlation between the 3-month change in the price of je fuel and the 3-month change in the futures price is 0.8. One heating oil futures contract is on 42,000 gallons 1. What type of hedger shouid American be long or short? 2. What is the minimum variance hedge ratio? 3. How many futures contracts should they use to obtain the mininum variance hedge ratiof? 4. What could happen to jeopardize this hedge? What is this risk called