Question set 2:

The CFO appreciates a concrete hedging analysis to validate your advice in your answer to Question 1.

A dataset is collected from trading platforms and is provided for:

Spot market Jet Fuel,

HO1 Commodity (Future), and

CO1 Commodity (Future).

See the data file in Excel. The file contains a description of the data series as if you are accessing the market yourself.

Here are some points about the datafile, please use the updated file which is online so that you do not need to match dates. I set this already for you:

PX_LAST is the last traded price for the week

PX_VOLUME is the traded volume

OPEN_INT is the open interest.

2 a- Estimate and interpret the minimum variance hedge ratio for each of the future commodity. Use the OLS method and comment on the significance of the results. (Support files for using regressions in OLS are provided). Use the full sample in your estimation.

2 b- Discuss whether differences in the hedge ratio between the two commodities will have any effect on the effectiveness of the hedge.

2 c- Recommend a convenient hedging strategy to the CFO using the data provided and explain the corresponding hedging position.

2 d- What are the potential factors that may weaken your suggested strategy. Discuss

(Calculations do not count as words)

Start Date End Date 6/1/2015 JETINYPR Index Dates PX_LAST 1/1/2016 110.07 1/8/2016 100.21 1/15/2016 88.43 1/22/2016 93.6 1/29/2016 104.75 2/5/2016 105.28 2/12/2016 106.81 2/19/2016 101.43 2/26/2016 102.12 3/4/2016 111.63 3/11/2016 116.55 3/18/2016 118.41 3/25/2016 114.79 4/1/2016 106.67 4/8/2016 114.54 4/15/2016 116.1 4/22/2016 122.64 4/29/2016 131.48 5/6/2016 125.23 5/13/2016 131.81 5/20/2016 141.5 5/27/2016 142.28 6/3/2016 140.81 6/10/2016 143.48 6/17/2016 140.67 6/24/2016 138.28 7/1/2016 145.03 7/8/2016 133.73 7/15/2016 131.62 7/22/2016 127.95 7/29/2016 118.6 8/5/2016 122.58 8/12/2016 133.11 8/19/2016 146.84 8/26/2016 145.6 9/2/2016 135.46 9/9/2016 137.54 9/16/2016 139.01 9/23/2016 133.23 9/30/2016 144.54 10/7/2016 148.81 10/14/2016 147.48 10/21/2016 148.4 10/28/2016 145.35 11/4/2016 11/11/2016 11/18/2016 11/25/2016 12/2/2016 12/9/2016 12/16/2016 12/23/2016 12/30/2016 1/6/2017 1/13/2017 1/20/2017 1/27/2017 2/3/2017 2/10/2017 2/17/2017 2/24/2017 3/3/2017 3/10/2017 3/17/2017 3/24/2017 3/31/2017 4/7/2017 4/14/2017 4/21/2017 4/28/2017 5/5/2017 5/12/2017 5/19/2017 5/26/2017 6/2/2017 6/9/2017 6/16/2017 6/23/2017 6/30/2017 7/7/2017 7/14/2017 7/21/2017 7/28/2017 8/4/2017 8/11/2017 8/18/2017 8/25/2017 9/1/2017 9/8/2017 9/15/2017 9/22/2017 9/29/2017 10/6/2017 10/13/2017 135.37 131.75 135.27 135.78 151.81 150.99 152.23 152.03 159.93 159.19 154.64 155.47 152.76 161.38 164.09 160.51 159.91 153.36 144.24 143.98 144.26 153.36 158.59 161.95 150.71 142.4 136.41 142.58 151.27 149.58 139.98 132.62 133.95 129.42 142.06 139.45 147.25 147.55 164 160.24 157.84 165.16 166.35 209.68 189.57 181.13 171.38 175.92 169.89 168.2 10/20/2017 10/27/2017 11/3/2017 11/10/2017 11/17/2017 11/24/2017 12/1/2017 12/8/2017 12/15/2017 12/22/2017 12/29/2017 1/5/2018 1/12/2018 1/19/2018 1/26/2018 2/2/2018 2/9/2018 2/16/2018 2/23/2018 3/2/2018 3/9/2018 3/16/2018 3/23/2018 3/30/2018 4/6/2018 4/13/2018 4/20/2018 4/27/2018 5/4/2018 5/11/2018 5/18/2018 5/25/2018 6/1/2018 6/8/2018 6/15/2018 6/22/2018 6/29/2018 7/6/2018 7/13/2018 7/20/2018 7/27/2018 8/3/2018 8/10/2018 8/17/2018 8/24/2018 8/31/2018 9/7/2018 9/14/2018 9/21/2018 9/28/2018 172.52 175.57 178.66 184.12 189.16 189.15 187.51 193.63 189.85 194.69 206.05 203.12 203.5 201.09 210.85 202.48 181.26 186.16 194.19 184.21 185.16 187.05 199.71 201.85 196.78 212.52 216.43 218.59 219.65 224.7 225.8 219.98 218.51 216.18 205.95 211.04 219.68 218.09 214.96 211.94 217.65 215.69 215.47 212.57 220.72 222.93 221.57 219.17 219.6 229.43 10/5/2018 10/12/2018 10/19/2018 10/26/2018 11/2/2018 11/9/2018 11/16/2018 11/23/2018 11/30/2018 12/7/2018 12/14/2018 12/21/2018 12/28/2018 1/4/2019 1/11/2019 1/18/2019 1/25/2019 2/1/2019 2/8/2019 2/15/2019 2/22/2019 3/1/2019 3/8/2019 3/15/2019 3/22/2019 3/29/2019 4/5/2019 4/12/2019 4/19/2019 4/26/2019 5/3/2019 5/10/2019 5/17/2019 5/24/2019 5/31/2019 6/7/2019 6/14/2019 6/21/2019 6/28/2019 7/5/2019 7/12/2019 7/19/2019 7/26/2019 8/2/2019 8/9/2019 8/16/2019 8/23/2019 8/30/2019 9/6/2019 9/13/2019 235.35 226.13 226.2 227.05 215.28 214.53 205.12 184.49 184.55 189.12 185.65 174.02 167.72 184.67 199.72 195.98 194.44 195.02 191.73 202.15 200.36 199.6 195.98 193.27 193.84 195.09 199.99 202.32 203.34 202.1 203.77 204.66 211.18 198.63 186.43 185.73 185.44 192.83 196.71 193.37 204.13 193.46 194.82 192.52 182.55 183.15 184.68 186.32 187.03 183.28 9/20/2019 9/27/2019 199.13 194.1 Start Date End Date 6/1/2015 HO1 Comdty Dates PX_LAST PX_VOLUMOPEN_INT 1/1/2016 110.07 54799 3436 1/8/2016 105.21 343668 77088 1/15/2016 93.43 310478 54181 1/22/2016 99.57 139258 33972 1/29/2016 105.51 106475 920 2/5/2016 105.9 320347 84680 2/12/2016 106.93 313449 57858 2/19/2016 102.55 195123 42046 2/26/2016 105.12 133664 6182 3/4/2016 116.13 218895 90050 3/11/2016 121.8 263248 61302 3/18/2016 123.91 202785 50762 3/25/2016 119.79 119333 30428 4/1/2016 113.17 133135 111661 4/8/2016 120.04 310788 86145 4/15/2016 123.22 288803 65897 4/22/2016 130.89 178373 39217 4/29/2016 137.79 101871 713 5/6/2016 133.73 299890 89791 5/13/2016 140.31 332217 75267 5/20/2016 149 284644 37981 5/27/2016 149.4 139240 5408 6/3/2016 148.81 229241 125672 6/10/2016 151.6 327565 95555 6/17/2016 148.17 267488 69052 6/24/2016 145.53 203092 29306 7/1/2016 151.15 137587 93236 7/8/2016 141.23 278939 70554 7/15/2016 139.74 312487 55329 7/22/2016 135.7 176766 31311 7/29/2016 127.6 113818 776 8/5/2016 131.7 343023 90340 8/12/2016 140.86 320769 64727 8/19/2016 151.96 261710 46244 8/26/2016 149.72 135155 15828 9/2/2016 140.96 160070 81347 9/9/2016 143.04 245636 66393 9/16/2016 140.51 310848 53521 9/23/2016 140.73 164059 24711 9/30/2016 152.79 97912 1439 10/7/2016 157.93 268887 91716 10/14/2016 156.73 285778 65989 10/21/2016 157.4 192325 39750 10/28/2016 154.22 118316 7228 11/4/2016 11/11/2016 11/18/2016 11/25/2016 12/2/2016 12/9/2016 12/16/2016 12/23/2016 12/30/2016 1/6/2017 1/13/2017 1/20/2017 1/27/2017 2/3/2017 2/10/2017 2/17/2017 2/24/2017 3/3/2017 3/10/2017 3/17/2017 3/24/2017 3/31/2017 4/7/2017 4/14/2017 4/21/2017 4/28/2017 5/5/2017 5/12/2017 5/19/2017 5/26/2017 6/2/2017 6/9/2017 6/16/2017 6/23/2017 6/30/2017 7/7/2017 7/14/2017 7/21/2017 7/28/2017 8/4/2017 8/11/2017 8/18/2017 8/25/2017 9/1/2017 9/8/2017 9/15/2017 9/22/2017 9/29/2017 10/6/2017 10/13/2017 143.03 140.12 145.77 147 165.81 163.74 167.23 166.28 170.43 170.32 165.14 164.59 161.89 166.51 166.59 163.64 164.04 159.36 150.36 150.85 149.76 157.36 162.84 164.95 155.33 150.4 143.66 149.33 158.27 156.33 148.48 143.12 142.7 137.17 147.55 144.82 151.5 151.52 163.97 164.86 163.46 162.04 162.23 174.68 176.57 179.88 181.63 181.17 174.39 179.7 357100 294692 248620 121937 205283 330959 266159 171232 70396 237053 335085 213893 126897 227892 303761 275953 135871 250152 374173 237691 153369 97604 277363 227062 206439 117392 364593 319300 269925 162113 173789 337501 301386 159605 89392 283499 283416 222227 113939 262756 354188 273383 174682 201412 280910 254911 147510 115373 315259 257938 84435 67583 46552 20513 107425 92820 60761 27469 5325 107298 84847 43471 14269 124704 104401 64696 18298 103935 86346 74172 37977 1171 105877 70935 45947 1720 126436 89298 54723 16517 112997 88913 58840 33007 485 106751 73836 41563 3262 127658 93378 62377 25688 101282 97595 72556 41624 1205 108460 79136 10/20/2017 10/27/2017 11/3/2017 11/10/2017 11/17/2017 11/24/2017 12/1/2017 12/8/2017 12/15/2017 12/22/2017 12/29/2017 1/5/2018 1/12/2018 1/19/2018 1/26/2018 2/2/2018 2/9/2018 2/16/2018 2/23/2018 3/2/2018 3/9/2018 3/16/2018 3/23/2018 3/30/2018 4/6/2018 4/13/2018 4/20/2018 4/27/2018 5/4/2018 5/11/2018 5/18/2018 5/25/2018 6/1/2018 6/8/2018 6/15/2018 6/22/2018 6/29/2018 7/6/2018 7/13/2018 7/20/2018 7/27/2018 8/3/2018 8/10/2018 8/17/2018 8/24/2018 8/31/2018 9/7/2018 9/14/2018 9/21/2018 9/28/2018 180.52 186.69 188.66 193.49 194.66 195.29 194.13 192.88 190.35 196.94 207.55 205.87 208.5 205.84 213.6 205.35 185.51 191.04 196.94 187.96 188.66 191.18 201.84 202.84 195.78 210.02 212.3 215.09 215.4 222.2 226.55 220.98 217.63 216.43 208.7 212.54 220.93 216.84 213.34 210.44 215.52 212.69 213.97 209.82 220.22 224.13 221.82 220.92 222.6 235.18 200961 136237 210215 327065 273005 120764 165313 357341 333794 202737 88841 315619 393402 247247 183873 189869 437658 322569 117060 188972 316080 271370 145407 72692 315119 398684 263057 146322 316385 431408 327419 161437 130195 352639 302313 197115 97690 266792 319588 229120 134054 213469 294995 267576 181329 99744 308121 359767 219413 132564 48067 14299 132851 96913 67932 39618 136897 111523 80806 30517 988 148895 104340 72575 25537 163329 101315 58092 21247 121127 86765 61354 35212 4277 124948 78591 50166 5863 132453 92007 66559 24648 132680 101174 71749 34578 940 119195 89527 53032 13510 116976 85527 74879 42802 1813 124914 98065 56496 1503 10/5/2018 10/12/2018 10/19/2018 10/26/2018 11/2/2018 11/9/2018 11/16/2018 11/23/2018 11/30/2018 12/7/2018 12/14/2018 12/21/2018 12/28/2018 1/4/2019 1/11/2019 1/18/2019 1/25/2019 2/1/2019 2/8/2019 2/15/2019 2/22/2019 3/1/2019 3/8/2019 3/15/2019 3/22/2019 3/29/2019 4/5/2019 4/12/2019 4/19/2019 4/26/2019 5/3/2019 5/10/2019 5/17/2019 5/24/2019 5/31/2019 6/7/2019 6/14/2019 6/21/2019 6/28/2019 7/5/2019 7/12/2019 7/19/2019 7/26/2019 8/2/2019 8/9/2019 8/16/2019 8/23/2019 8/30/2019 9/6/2019 9/13/2019 239.23 232.13 230.2 230.3 217.28 217.28 207.37 187.62 184.55 188.62 184.53 173.27 166.47 176.92 187.97 191.6 189.19 191.27 190.85 202.03 203.11 200.1 199.98 196.77 196.59 197.34 204.24 207.07 207.09 205.12 207.02 205.04 209.55 197.13 184.18 182.48 182.94 191.58 194.46 190.5 198.01 188.96 190.44 189.02 180.8 181.28 181.56 182.82 190.03 187.78 301308 360062 240488 165450 213813 468459 344405 143810 104654 298615 281003 244589 81590 187275 310890 291006 110621 137996 300356 316725 132811 138917 284725 380369 177820 86799 269665 330127 157410 121080 268205 319831 318034 181912 72532 327962 278618 173650 89650 201803 272647 246434 105230 185613 326024 257003 158871 99651 268477 294072 138860 89320 64091 21681 138696 93508 65751 39581 1781 106677 75113 32071 4064 109341 81852 51806 30908 113788 109678 78693 42189 138411 129303 58892 35819 250 107402 73484 50864 14127 118359 86578 58326 28787 952 102783 63911 33825 257 95534 76528 50871 20337 131321 116664 86784 47162 1798 105362 75893 9/20/2019 9/27/2019 198.63 194.16 296116 116225 40960 3807 Start Date End Date 6/1/2015 CO1 Comdty Dates PX_LAST 1/1/2016 1/8/2016 1/15/2016 1/22/2016 1/29/2016 2/5/2016 2/12/2016 2/19/2016 2/26/2016 3/4/2016 3/11/2016 3/18/2016 3/25/2016 4/1/2016 4/8/2016 4/15/2016 4/22/2016 4/29/2016 5/6/2016 5/13/2016 5/20/2016 5/27/2016 6/3/2016 6/10/2016 6/17/2016 6/24/2016 7/1/2016 7/8/2016 7/15/2016 7/22/2016 7/29/2016 8/5/2016 8/12/2016 8/19/2016 8/26/2016 9/2/2016 9/9/2016 9/16/2016 9/23/2016 9/30/2016 10/7/2016 10/14/2016 10/21/2016 10/28/2016 37.28 33.55 28.94 32.18 34.74 34.06 33.36 33.01 35.1 38.72 40.39 41.2 40.44 38.67 41.94 43.1 45.11 48.13 45.37 47.83 48.72 49.32 49.64 50.54 49.17 48.41 50.35 46.76 47.61 45.69 42.46 44.27 46.97 50.88 49.92 46.83 48.01 45.77 45.89 49.06 51.93 51.95 51.78 49.71 PX_VOLUMOPEN_INT 579131 281369 1392656 146007 797394 373704 1808172 211455 1127143 33219 1695833 392318 1592367 309595 1526104 221742 1262407 65649 1136947 507026 1592079 329751 1288820 253731 946494 126461 645239 499288 1555416 453932 1505394 372914 1622029 211277 704301 57248 1302759 478804 1682425 361468 1434189 241438 1025893 62425 815715 434913 1116507 370328 1241686 255466 1382777 138331 803503 499299 1263688 448066 1400425 294057 1222122 191711 755344 38324 1331065 414615 1316119 345731 1464829 264643 1292207 110969 780185 465612 1316632 382505 1418785 270339 1354970 152754 779773 33057 1459501 518826 1521939 424651 1342619 250374 1052419 55265 11/4/2016 11/11/2016 11/18/2016 11/25/2016 12/2/2016 12/9/2016 12/16/2016 12/23/2016 12/30/2016 1/6/2017 1/13/2017 1/20/2017 1/27/2017 2/3/2017 2/10/2017 2/17/2017 2/24/2017 3/3/2017 3/10/2017 3/17/2017 3/24/2017 3/31/2017 4/7/2017 4/14/2017 4/21/2017 4/28/2017 5/5/2017 5/12/2017 5/19/2017 5/26/2017 6/2/2017 6/9/2017 6/16/2017 6/23/2017 6/30/2017 7/7/2017 7/14/2017 7/21/2017 7/28/2017 8/4/2017 8/11/2017 8/18/2017 8/25/2017 9/1/2017 9/8/2017 9/15/2017 9/22/2017 9/29/2017 10/6/2017 10/13/2017 45.58 44.75 46.86 47.24 54.46 54.33 55.21 55.16 56.82 57.1 55.45 55.49 55.52 56.81 56.7 55.81 55.99 55.9 51.37 51.76 50.8 52.83 55.24 55.89 51.96 51.73 49.1 50.84 53.61 52.15 49.95 48.15 47.37 45.54 47.92 46.71 48.91 48.06 52.52 52.42 52.1 52.72 52.41 52.75 53.78 55.62 56.86 57.54 55.62 57.17 1530062 1634427 1480176 1247282 1157819 1466746 1504910 1061882 355915 1127844 1597985 1448860 1244253 997043 1527819 1343150 1178771 1028203 1793309 1518167 1394415 678387 1454119 1338152 1717806 956929 1914791 1722088 1700709 1789410 1129852 1871650 1631092 1593672 834799 1357646 1444280 1432978 1174740 1506038 1457295 1573029 1346543 729837 1359077 1445664 1255506 724444 1733271 1573759 542455 444141 301220 151260 537896 439605 292074 108637 616326 592737 411590 248359 105536 519066 427392 289409 105695 521037 477077 371985 237885 72150 551460 426421 234927 37166 566370 452016 280657 113290 536090 489117 343248 186621 35436 556435 468699 261756 58754 465687 422130 322929 154343 537015 479765 336107 214019 44316 612045 541030 10/20/2017 10/27/2017 11/3/2017 11/10/2017 11/17/2017 11/24/2017 12/1/2017 12/8/2017 12/15/2017 12/22/2017 12/29/2017 1/5/2018 1/12/2018 1/19/2018 1/26/2018 2/2/2018 2/9/2018 2/16/2018 2/23/2018 3/2/2018 3/9/2018 3/16/2018 3/23/2018 3/30/2018 4/6/2018 4/13/2018 4/20/2018 4/27/2018 5/4/2018 5/11/2018 5/18/2018 5/25/2018 6/1/2018 6/8/2018 6/15/2018 6/22/2018 6/29/2018 7/6/2018 7/13/2018 7/20/2018 7/27/2018 8/3/2018 8/10/2018 8/17/2018 8/24/2018 8/31/2018 9/7/2018 9/14/2018 9/21/2018 9/28/2018 57.75 60.44 62.07 63.52 62.72 63.86 63.73 63.4 63.23 65.25 66.87 67.62 69.87 68.61 70.52 68.58 62.79 64.84 67.31 64.37 65.49 66.21 70.45 70.27 67.11 72.58 74.06 74.64 74.87 77.12 78.51 76.44 76.79 76.46 73.44 75.55 79.44 77.11 75.33 73.07 74.29 73.21 72.81 71.83 75.82 77.42 76.83 78.09 78.8 82.72 1876875 1390469 1097456 1792342 1704301 1210282 948583 1385513 1842034 936370 389713 902201 1464846 1325426 1432227 1002598 1978055 1598519 1115381 929383 1375037 1301004 1569567 482263 1350699 1863957 1730981 1259188 1404783 1691010 1625063 1348349 622905 1670594 1349095 1764745 891378 1205388 1753415 1448867 1045686 788745 1124879 1205546 1185779 527226 1192272 1399309 1340393 757925 315391 141967 635198 515186 374662 218043 629824 508521 307124 131240 652480 599424 442782 354058 181840 598047 415345 264457 139887 508221 402202 309956 176855 59443 593835 455326 302204 76777 577053 452840 369354 170718 540818 466566 371688 206107 58550 474306 360024 268621 101814 419656 360464 284459 159502 37338 421386 325339 180398 46263 10/5/2018 10/12/2018 10/19/2018 10/26/2018 11/2/2018 11/9/2018 11/16/2018 11/23/2018 11/30/2018 12/7/2018 12/14/2018 12/21/2018 12/28/2018 1/4/2019 1/11/2019 1/18/2019 1/25/2019 2/1/2019 2/8/2019 2/15/2019 2/22/2019 3/1/2019 3/8/2019 3/15/2019 3/22/2019 3/29/2019 4/5/2019 4/12/2019 4/19/2019 4/26/2019 5/3/2019 5/10/2019 5/17/2019 5/24/2019 5/31/2019 6/7/2019 6/14/2019 6/21/2019 6/28/2019 7/5/2019 7/12/2019 7/19/2019 7/26/2019 8/2/2019 8/9/2019 8/16/2019 8/23/2019 8/30/2019 9/6/2019 9/13/2019 84.16 80.43 79.78 77.62 72.83 70.18 66.76 58.8 58.71 61.67 60.28 53.82 52.2 57.06 60.48 62.7 61.64 62.75 62.1 66.25 67.12 65.07 65.74 67.16 67.03 68.39 70.34 71.55 71.97 72.15 70.85 70.62 72.21 68.69 64.49 63.29 62.01 65.2 66.55 64.23 66.72 62.47 63.46 61.89 58.53 58.64 59.34 60.43 61.54 60.22 1623229 1816180 1600644 1595264 940858 1526062 1787745 1458314 810945 1651498 1206159 1489756 272922 1009521 1507588 1380557 1222272 735098 1279481 1411373 1121854 767532 1325752 1233441 1265898 714712 1507313 1359820 1028707 1422931 999994 1483726 1527644 1703861 586554 1836429 1622166 1536001 702971 1348989 1394941 1588627 1171706 1004421 1773685 1387963 1323738 692158 1249281 1386291 514507 432933 342553 145716 477269 367649 269272 210988 60010 354032 305864 109100 43746 495064 377813 314182 170591 449502 377459 314223 162400 419414 412629 360029 235140 66084 490939 397564 307045 142400 490758 416392 330123 199176 50171 431367 331594 209933 97560 463509 364045 271528 112448 437065 348001 301417 179903 46552 470476 382863 9/20/2019 9/27/2019 64.28 61.91 2134809 835420 232656 79899