Question 1: Marking Accounts and Marking to the Market (14 points) (data is available on Blackboard in spreadsheet on worksheet titled: "FNCE 4408-Assignment05.xlsx") It is currently January 2, 2013 and the spot price for KT type Jet Fuel is 250.90 /gallon. The futures price of No 2 Heating Oil June 2013 contract is $243.73 /gallon. (Contract Size is for 42000 gallons) 1. A Treasurer at a major Airlines knows that her company will need to purchase 350 million gallons of KT type jet fuel in May and is trying hedge the company's fuel costs by establishing a long cross hedge with Heating Oil futures. Using the data prior to January 2, 2013, determine the optimal hedge ratio and how many contracts she will need to short Suppose the hedge is established on January 2, 2013 and held till May 15, 2013. Use the margin requirements determined from the first question to calculate the number of times the treasurer receives margin calls. Assume that all margin calls are met and that balances in excess of the initial margin are withdrawn. 3. Determine how much the Airline effectively pays for its fuel on May 15, 2013. Also determine the variance of the basis of this hedge over its life (January 2, 2013 to May 15, 2013), and compare this to the variance of the price of Jet Fuel over the same period. 2. Question 1: Marking Accounts and Marking to the Market (14 points) (data is available on Blackboard in spreadsheet on worksheet titled: "FNCE 4408-Assignment05.xlsx") It is currently January 2, 2013 and the spot price for KT type Jet Fuel is 250.90 /gallon. The futures price of No 2 Heating Oil June 2013 contract is $243.73 /gallon. (Contract Size is for 42000 gallons) 1. A Treasurer at a major Airlines knows that her company will need to purchase 350 million gallons of KT type jet fuel in May and is trying hedge the company's fuel costs by establishing a long cross hedge with Heating Oil futures. Using the data prior to January 2, 2013, determine the optimal hedge ratio and how many contracts she will need to short Suppose the hedge is established on January 2, 2013 and held till May 15, 2013. Use the margin requirements determined from the first question to calculate the number of times the treasurer receives margin calls. Assume that all margin calls are met and that balances in excess of the initial margin are withdrawn. 3. Determine how much the Airline effectively pays for its fuel on May 15, 2013. Also determine the variance of the basis of this hedge over its life (January 2, 2013 to May 15, 2013), and compare this to the variance of the price of Jet Fuel over the same period. 2
