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Suppose Company C needs to purchase 100 barrels of gasoline 1 months from now to operate its fleet of trucks. The standard deviation of gasoline

Suppose Company C needs to purchase 100 barrels of gasoline 1 months from now to operate its fleet of trucks. The standard deviation of gasoline spot-price movements is 30%. Suppose there are no futures contracts available on gasoline, however futures on barrels of oil are available; the standard deviation of oil-futures price movements is 20% and the correlation between the oil and gasoline price movements is 80%. Assume for simplicity that gas and oil, spot and futures, are all currently trading at $50 per barrel and that one future represents one barrel. Calculate the optimal hedge ratio, using oil futures to hedge your gasoline position.

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