Question
Jumbo Airline, a hypothetical company, will purchase 2.5 million gallons of jet fuel in one month and hedges using heating oil futures. Suppose that size
Jumbo Airline, a hypothetical company, will purchase 2.5 million gallons of jet fuel in one month and hedges using heating oil futures. Suppose that size of one heating oil futures is unknown. From historical data sigma=0.0325, sigma= 0.0295, and sigma= 0.908. In addition, the spot price is 1.95 and the futures price is 1.98 (both dollars per gallon).
(1) What will be the size of heating oil futures if 4.51 heating oil futures are required for optimal hedge with tailing? please explain.
(2) What will be the size of heating oil futures if 4.51 heating oil futures are required for optimal hedge withour tailing? please explain
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started