You are a refiner who has a commitment to sell kerosene (one of your products) later...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
You are a refiner who has a commitment to sell kerosene (one of your products) later in 2019, but you think that the kerosene futures market is too illiquid now. Heating oil futures however, are quite liquid, and you believe they are reasonably well correlated with kerosene spot prices. Given the provided time series of weekly changes in heating oil futures and kerosene spot prices, what is the appropriate hedge ratio? Use the formula: O h* = p. S (both kerosene and heating oil are priced in gallons). Regress kerosene spot prices changes on heating oil futures changes and show that the hedge ratio is the slope of this regression. If you have to hedge 1,000,000 gallons of kerosene and there are 42,000 gallons per heating oil contract, how may heating oil contracts should you short? You are a refiner who has a commitment to sell kerosene (one of your products) later in 2019, but you think that the kerosene futures market is too illiquid now. Heating oil futures however, are quite liquid, and you believe they are reasonably well correlated with kerosene spot prices. Given the provided time series of weekly changes in heating oil futures and kerosene spot prices, what is the appropriate hedge ratio? Use the formula: O h* = p. S (both kerosene and heating oil are priced in gallons). Regress kerosene spot prices changes on heating oil futures changes and show that the hedge ratio is the slope of this regression. If you have to hedge 1,000,000 gallons of kerosene and there are 42,000 gallons per heating oil contract, how may heating oil contracts should you short?
Expert Answer:
Answer rating: 100% (QA)
To determine the appropriate hedge ratio we need to regress the changes in kerosene spot prices on t... View the full answer
Related Book For
Managerial Accounting Decision Making and Performance Management
ISBN: 978-0273764489
4th edition
Authors: Ray Proctor
Posted Date:
Students also viewed these accounting questions
-
You believe that oil prices will be rising more than expected and that rising prices will result in lower earnings for industrial companies that use a lot of petroleum-related products in their...
-
Hedge of Firm Commitment: Short in Commodity Futures On May 1, 2014, Keister, Inc., sells 100,000 units of commodity futures at $5/unit for delivery in 120 days and makes an initial margin deposit of...
-
You went long 20 June 2016 crude oil futures contracts at a price of $42.18. Looking back at Figure 14.1, if you closed your position at the settle price on this day, what was your profit? Figure...
-
Given the following information, prepare a production report with materials added at the beginning and ending work in process inventory being 20% complete with regard to conversion costs. Costs to...
-
Orphan Medical, Inc., was a pharmaceutical company that focused on central nervous system disorders. Its major product was the drug Xyrem. In June 2004, Orphan merged with Jazz, and Orphan...
-
In recent decades, economic inequality (both income inequality and wealth inequality) has become a prominent topic in American politics. If it is a problem, given our discussion of Fiscal and...
-
As can easily be shown, the probabilities of getting 0 , 1 , or 2 heads with a pair of balanced coins are \(\frac{1}{4}, \frac{1}{2}\), and \(\frac{1}{4}\). What is the probability of getting 2 tails...
-
The following cost of quality data were collected at the installment loan department of the Kenney Bank. Classify these data into the appropriate cost of quality categories and analyze the results....
-
8 Sean has a job mowing grass for the city, using a riding mower. He can mow of an acre per hour. How long will he need to mow the 3-acre city park? He will need hours to mow the park. (Type an...
-
Salmon Limited reported profit of $465,325 for its November 30, 2021, year end. Cash dividends of $90,000 on the common shares and $65,000 on the noncumulative preferred shares were declared and paid...
-
The following five questions are all based on the following Sensitivity Report: Final Reduced Objective Allowable Allowable Cell Name Value Cost Coefficient Increase Decrease $B$4 Units of X1 1E+30...
-
The pilgrims who settled in Plymouth, Massachusetts, concluded that _______. a) only a social society of collective ownership would make economic sense b) a capitalist society with large industrial...
-
The rank of a singular \(4 \times 4\) matrix is 3. (True/False)
-
Interpret the results about the hypothesis testing of two proportions: a. Comment if the null hypothesis should be rejected at 0.05 level of significance when the \(p\)-value was calculated as 0.047...
-
The government-wide Statement of Activities may report all of the following except a. indirect expenses. b. unallocated depreciation. c. transfers. d. charges for services. e. deferred revenue.
-
What is the yield to maturity on a simple loan for \($1\),500 that requires a repayment of \($15\),000 in five years?
-
At what point (s) on the curve y = cos r-sinr, where 0x, is the tangent line horizontal? Students will show all solving steps to earn full credit including derivative, solving an equation, and...
-
Prove the following D,(cos x) = - sin x (Hint: Apply the identity cos(A + B) = cos A cos B sin A sin B)
-
Pierce Pommery specializes in the manufacture of dry cider. The 1-litre bottles sell for 3.00 each, with 25% of sales on cash terms and 75% on one months credit. The budget shows the following sales...
-
Gorgon Group plc is a manufacturer with a divisional structure. The Odeen division makes a single product which it sells outside the Gorgon Group as well as to the Trey division. Odeens product has a...
-
Burgabar Corporation owns and operates a range of fast food outlets throughout the East End of London. A summary of next years budget (before head office costs are taken into account) is given below:...
-
Presented below is selected information related to Tsui Repairs at December 31, 2025. Tsui reports financial information monthly (amounts in thousands). a. Determine the total assets of Tsui Repairs...
-
Explain the career opportunities in accounting.
-
Collins Computer Timeshare entered into the following transactions during May 2025. 1. Purchased computers for R\($20,000\) from Digital Equipment on account. 2. Paid R\($4,000\) cash for May rent on...
Study smarter with the SolutionInn App