On January, an airline company, selling tickets well in advance, wants to hedge against the risk...
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On January, an airline company, selling tickets well in advance, wants to hedge against the risk associated with jet fuel price fluctuations. In the absence of Futures contracts traded on jet fuel, they choose to use NYMEX Futures contracts on heating fuel oil. The futures prices of heating fuel oil is $3.28 per gallon. Suppose the standard deviation of monthly changes in the price of jet fuel is $0.035, the standard deviation of monthly changes in the Futures price of heating fuel oil is $0.040 and the correlation between the two is 0.85. 1) What is the optimal hedge ratio for a 1-month contract? What does it mean? 2) If your initial exposure is on buying 1.5 million gallons of jet fuel, and the size of the NYMEX Futures contract on heating fuel oil is 42,000 gallons, how should you tailor your hedge? One month later, the company buys jet fuel on the spot market for a price of $3.22 per gallon. The same day, the futures position is closed out at a price of $3.25 per gallon. 3) What is the profit/loss from the futures position? And what is the effective price per gallon? On January, an airline company, selling tickets well in advance, wants to hedge against the risk associated with jet fuel price fluctuations. In the absence of Futures contracts traded on jet fuel, they choose to use NYMEX Futures contracts on heating fuel oil. The futures prices of heating fuel oil is $3.28 per gallon. Suppose the standard deviation of monthly changes in the price of jet fuel is $0.035, the standard deviation of monthly changes in the Futures price of heating fuel oil is $0.040 and the correlation between the two is 0.85. 1) What is the optimal hedge ratio for a 1-month contract? What does it mean? 2) If your initial exposure is on buying 1.5 million gallons of jet fuel, and the size of the NYMEX Futures contract on heating fuel oil is 42,000 gallons, how should you tailor your hedge? One month later, the company buys jet fuel on the spot market for a price of $3.22 per gallon. The same day, the futures position is closed out at a price of $3.25 per gallon. 3) What is the profit/loss from the futures position? And what is the effective price per gallon?
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Answer rating: 100% (QA)
1 The optimal hedge ratio h is calculated using the formula h hosigmajet fuelsigmafutures where ho c... View the full answer
Related Book For
Intermediate Accounting
ISBN: 978-1118300855
10th Canadian Edition Volume 2
Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield, Nicola M. Young, Irene M. Wiecek, Bruce J. McConomy
Posted Date:
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