An aviation-fuel supplier expects to sell 2,100,000 gallons of aviation fuel to an airline in 3 months and decides to use heating-oil futures contracts to hedge its exposure. The size of one heating-oil futures contract is 42,000 gallons. The standard deviation of DAILY percentage changes in the spot and futures prices are 0.025 and 0.04, respectively. The correlation between the spot-price change and the futures-price change is 0.90. The spot price of aviation fuel is $1.25 per gallon and the futures price is $1.50 per gallon. a) Calculate the minimum-variance hedge ratio. b) How should the aviation-fuel supplier hedge its exposure (long vs. short position)? c) What is this hedge called and how does this hedge affect basis risk? Answer concisely. d) Calculate the optimal number of futures contracts that the aviation-fuel supplier must use.

Answer rating: 100% (QA)

Absolutely lets tackle the aviation fuel suppliers hedging problem a Minimumvariance hedge ratio We ... View the full answer