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Optimal hedge ratio and optimal number of contracts

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a) An airline company "ABC" wants to hedge against price movements on jet fuel. Company "ABC" needs to buy 2 million gallons of jet fuel. It decides to use futures on heating oil to hedge against price movements. Each heating oil futures contract is of size 42,000 gallons. Assume that the standard deviation of the change in spot prices is 0.0263 and the standard deviation of the change in futures prices is 0.0313. Also, assume that the correlation between the change in spot prices and change in futures prices is 0.928. Determine the optimal hedge ratio and the optimal number of contracts

Reference no: EM132580219

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