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QT has a network of 150 gasoline outlets throughout the central United States. At any one time, the company has 1.125 million gallons of gasoline
QT has a network of 150 gasoline outlets throughout the central United States. At any one time, the company has 1.125 million gallons of gasoline inventory. Derek Larkin has suggested that QT hedge the risk of its gasoline inventories. He says that the appropriate hedging technique would be risk-minimization. (a) What is risk-minimization hedging? (b) Derek estimates the following relationship between spot, St, and futures Ft, prices using the nearby 42,000-gallon unleaded regular gasoline contract: AS, = a + BAF, + & Derek's estimation gives the following results: a=0.5231 B=0.9217 R? = 0.88 Based on these results, what should QT do to hedge its inventory price risk
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