On February 26th, the CFO of an airline company wants to hedge its exposure on Jet Fuel
Question:
On February 26th, the CFO of an airline company wants to hedge its exposure on Jet Fuel Kerosene for the next 5 months. He is bundling up his risk into a July 2021 55,000 bbl. exposure. He selected two possible hedging futures and these are June and September futures on Crude Oil with a physical delivery in Cushing, Oklahoma.
The CFO gathers some information about the future contract he wants to take and see that the following info is available:
Covariance between Crude Oil Futures and Jet Fuel: 0.07
Standard deviation of Crude Oil 28%
Standard deviation of Jet Fuel 32%
Size of the Crude Oil future contracts 1000 bbl.
c)How many contracts should the CFO do to make an optimal hedge of his position?
d)Can you deduct the correlation of Crude Oil and Jet Fuel from these data?
e)Looking at the CME data we can see that actually July and August futures existed but that the CFO didn't want to use them. Explain why he only selected June and September and not the July and August?
Expert Answer:
c To determine the number of contracts for an optimal hedge we need to consider the covariance and standard deviations of Crude Oil and Jet Fuel as we... View the full answer
