Jet Fuel Cross-Hedge Using the NYMEX Heating Oil Futures Contract On January 6, 2000, Justin Ross, a fuel purchasing director at Cowboy Airlines, wants to hedge his September jet fuel consumption at current prices. Justin wants to hedge a total of 168,000 gallons (40,000 barrels). He buys a September New York Harbor heating oil futures contract on the NYMEX at 70.28 cents per gallon (one contract size is for 42,000 gallons). On the same day, the New York jet fuel spot price is 81.28 cents per gallon. The director closes out this futures contract on August 29, 2000, at 66.59 cents per gallon. The spot price of NY jet fuel on August 29 is 69.99 cents per gallon.

a. Cash Price (i.e., Spot Price)

January 6 cash price _____?___cents/gallon

August 29 cash price ______?__cents/gallon

Futures Price __?__ cents/gallon gain

Basis __?__ cents/gallons basis loss

Result: Cash purchase price of jet fuel __?__ cents/gallon

Minus heating oil futures gain __?__ cents/gallons

Net purchase price of jet fuel __?__ cents/gallon

b. Is this a long hedge or short hedge?

c. Did the basis strengthen or weaken between January 6 and August 29?

d. Did the basis change benefit the hedger (i.e., was the basis change a gain to benefit the hedger or a loss to harm the hedger)?