1. This is a problem that has TWO questions. Therefore, please choose TWO answers (one choice for each question) to get full credit for this question.

   An airline expects to purchase 2 million gallons of jet fuel in one month and decides to use heating oil futures for hedging. Each heating fuel futures contract size = 42,000 gallons. With some historical data, we find the following statistics:

   = 0.9, _S = 0.03, _F = 0.04

   #1) What is the optimal hedge ratio that should be used?

   #2) What is the optimal hedging strategy for this airline company?

   		#1) 1.2
   		#1) 1.0
   		#1) 0.7777
   		#1) 0.675
   		#2) SHORT 32 FUTURES CONTRACT
   		#2) LONG 32 FUTURES CONTRACT
   		#2) SHORT 57 FUTURES CONTRACT
   		#2) LONG 57 FUTURES CONTRACT