1. There are futures contracts available on jet fuel. An airline company has to buy 3 million gallons of jet fuel in three months. Suppose you are in charge of this companys hedging activity. Would you undertake a long hedge or a short hedge? Briefly explain.
2. Suppose that the standard deviation of monthly changes in the price of commodity A is $2. The standard deviation of monthly changes in a futures price for a contract on commodity B (which is similar to commodity A) is $3. The correlation between the futures price and the spot commodity price is 0.9. What hedge ratio should be used when hedging a one month exposure to the price of commodity A?