Question: You are a refiner who has a commitment to sell kerosene (one of your products) later in 2019, but you think that the kerosene

You are a refiner who has a commitment to sell kerosene (one

You are a refiner who has a commitment to sell kerosene (one of your products) later in 2019, but you think that the kerosene futures market is too illiquid now. Heating oil futures however, are quite liquid, and you believe they are reasonably well correlated with kerosene spot prices. Given the provided time series of weekly changes in heating oil futures and kerosene spot prices, what is the appropriate hedge ratio? Use the formula: O h* = p. S (both kerosene and heating oil are priced in gallons). Regress kerosene spot prices changes on heating oil futures changes and show that the hedge ratio is the slope of this regression. If you have to hedge 1,000,000 gallons of kerosene and there are 42,000 gallons per heating oil contract, how may heating oil contracts should you short?

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