Daydayfly Airline knows that it will need to purchase 10,000 metric tons of jet fuel in...
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Daydayfly Airline knows that it will need to purchase 10,000 metric tons of jet fuel in three months. It wants some protection against its exposure to the jet fuel price risk. Daydayfly can hedge using heating oil futures contracts traded on NYMEX. The notional for one contract is 42,000 gallons. Since there is no futures contract on jet fuel, the risk manager wants to check if heating oil could provide an efficient hedge instead. The current price of jet fuel is $277 per metric ton. The futures price of heating oil is $0.6903 per gallon. The standard deviation of the rate of change in jet fuel prices and of the futures over three months are respectively 21.17% and 18.59%. The correlation between jet fuel and heating oil futures is 0.8243. a)Determine the notional and standard deviation of the unhedged fuel cost. b)Determine the optimal number of futures contracts to buy or sell rounded to the closest integer. c)Determine the standard deviation of the hedged fuel cost Daydayfly Airline knows that it will need to purchase 10,000 metric tons of jet fuel in three months. It wants some protection against its exposure to the jet fuel price risk. Daydayfly can hedge using heating oil futures contracts traded on NYMEX. The notional for one contract is 42,000 gallons. Since there is no futures contract on jet fuel, the risk manager wants to check if heating oil could provide an efficient hedge instead. The current price of jet fuel is $277 per metric ton. The futures price of heating oil is $0.6903 per gallon. The standard deviation of the rate of change in jet fuel prices and of the futures over three months are respectively 21.17% and 18.59%. The correlation between jet fuel and heating oil futures is 0.8243. a)Determine the notional and standard deviation of the unhedged fuel cost. b)Determine the optimal number of futures contracts to buy or sell rounded to the closest integer. c)Determine the standard deviation of the hedged fuel cost
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Answer rating: 100% (QA)
a The notional of the unhedged fuel cost can be calculated by multiplying the quantity of jet fuel n... View the full answer
Related Book For
Intermediate Accounting
ISBN: 978-0470161012
9th Canadian Edition, Volume 2
Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield.
Posted Date:
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