Question 2 Part A: On June 8, a Chinese company knows it needs to buy 20,000 barrels of crude oil some time in November 8 in the same year. The current December oil futures price is $68 per barrel, spot price on Nov 8 is $75, December futures price on Nov 8 is $72. What is the net cost of oil? What is the effective price paid if hedge is conducted? (5 points) Part B: A company wishes to hedge its exposure to a new fuel whose price changes have a 0.6 correlation with gasoline forward price changes. The company will lose $1 million for each 1 cent increase in the price per gallon of the new fuel over the next three months. The new fuel's price change has a standard deviation that is 50% greater than price changes in gasoline forward prices. If gasoline forward are used to hedge the exposure what should the hedge ratio be? How many gasoline forward contracts should be traded if each contract sizes 42.000 gallons? (5 points) Part C: A trader owns 55,000 troy oz of silver and decides to hedge with 6-month silver futuros contracts. Each futures contract is on 5,000 troy oz. The standard deviation of the change in the spot price of silver is 0.43. The standard deviation of the change in silver futures prices is 0.40. The covariance between the two price changes is 0.1634. (a) What is the minimum variance hedge ratio? (5 points) (b) What is the optimal number of futures contracts? (5 points) bility Question 2 Part A: On June 8, a Chinese company knows it needs to buy 20,000 barrels of crude oil some time in November 8 in the same year. The current December oil futures price is $68 per barrel, spot price on Nov 8 is $75, December futures price on Nov 8 is $72. What is the net cost of oil? What is the effective price paid if hedge is conducted? (5 points) Part B: A company wishes to hedge its exposure to a new fuel whose price changes have a 0.6 correlation with gasoline forward price changes. The company will lose $1 million for each 1 cent increase in the price per gallon of the new fuel over the next three months. The new fuel's price change has a standard deviation that is 50% greater than price changes in gasoline forward prices. If gasoline forward are used to hedge the exposure what should the hedge ratio be? How many gasoline forward contracts should be traded if each contract sizes 42.000 gallons? (5 points) Part C: A trader owns 55,000 troy oz of silver and decides to hedge with 6-month silver futuros contracts. Each futures contract is on 5,000 troy oz. The standard deviation of the change in the spot price of silver is 0.43. The standard deviation of the change in silver futures prices is 0.40. The covariance between the two price changes is 0.1634. (a) What is the minimum variance hedge ratio? (5 points) (b) What is the optimal number of futures contracts? (5 points) bility
