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The following table contains information for two similar commodity product prices: Commodity Jet Fuel Crude Oil Standard deviation 30% 20% Correlation with Crude Oil 0.6
The following table contains information for two similar commodity product prices:
| Commodity | Jet Fuel | Crude Oil |
| Standard deviation | 30% | 20% |
| Correlation with Crude Oil | 0.6 | 1.0 |
- Calculate the minimum variance hedge ratio if a trader is trying to hedge jet fuel with crude oil.
- If a trader has $100 mil worth of jet fuel, how many contracts of crude oil, in what direction, will completely hedge the jet fuel? The size of 1 crude oil contract is $10 mil.
- The traders assistant is curious why the trader is trying to get numbers with futures only. The assistant suggests using crude oil options instead. Do you agree with the assistants suggestion? Explain why or why not.
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