Hi I am stuck with this problems 7...

I have the answer in EXCEL it's in RED but I have no idea on how to do it on paper as you see I tried doing so down below.

Can someone please explain to me how you can calculate the variance, and the correlation coefficient which is that "p" symbol also how you can calculate the "h*" and finally how u get the 21 optimum number of contracts.

the answers are given below I just dont understand how Variance = .001 , .001

p = 0.949 and H* = .906

PLEASE DO NOT USE EXCEL I NEED IT ON PAPER STEP BY STEP like how I did it on my own paper.

E +|25 . 0.001 p .- 0.949 11*: 0.906 Amount in Jet Fuel Hedge: 1,000,000.00 gallons Contracts Needed: 21.58 @ 42,000 gallons/contract Optimum Numberof Contracts: 21 This number is ROUNDED DOWN f1 close = variance P = correlation cokficient of the difference between the spot price & future price observation mean X X ma 1 2. 0 (xi - * ) ( X 1 - x ) -.14 MO 2 1.86 3. 0 3.5 - -14 2 . 86 MS 3 - 4,0 8 . 2 - 114 - 4.14 Mo 4 010 - 1 14 - , 14 Mos 3.5 02 -.14 3. 36 113 MO 6 - 3.0 -, 14 - 3.14 9.9 Mo 7 - 2.5 . 14 - 2.64, 6. 7 A 7 56.72 7 h* = P oz = (. 949) ( . 601 ) (.001 ) 0-15-9 - 17.9- 5- 315N = h QA = (.61) (5220) N = GS contract 7. You are the CFO of an airline and you are concerned that jet fuel prices will increase. You know that there are no futures for jet fuel, but there are futures for gasoline. So, you call decide to check the spot price of jet fuel and gasoline. Changes in their relative prices are as follows: Mo 1 Mo 2 Mo 3 Mo 4 Mo 5 Mo 6 Mo 7 Mo A Gas Futures 2.0% 3.0% -4.0% 0.0% 3.5% -3.0% -2.5% Mo A Jet Fuel 2.0% 3.5% -5.0% 1.0% 2.6% -2.0% -1.0% If you are trying to hedge 1,000,000 gallons of jet fuel, how many gasoline contracts do you need to buy to adequately hedge your position? (Each futures contract represents 42,000 gallons of gasoline)