Question
Theta Airlines wants to hedge its use of jet fuel. The airline is expected to purchase 3.9 million gallons of fuel in the spot market
Theta Airlines wants to hedge its use of jet fuel. The airline is expected to purchase 3.9 million gallons of fuel in the spot market this year. The airline wants to use gulf coast jet fuel futures to hedge its risk. The futures contracts are based on the Jet Fuel Price Index published by S&P Global Platts. The size of one contract is 42,000 gallons or 1,000 barrels. The correlation between the futures price changes and the spot price changes is 0.91. The standard deviation of the futures price is $1.05/gallon while the standard deviation of the spot price is $0.84/gallon. What is the hedge ratio? Is it long or short hedge? How many contracts are needed?
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