Question

A company wishes to hedge its exposure to a new fuel whose price changes have a...

A company wishes to hedge its exposure to a new fuel whose price changes have a 0.92 correlation coefficient with gasoline futures price changes. The company will lose $10,000 for each 5 cent increase in the price per gallon of the new fuel over the next three months. The new fuel's price change has a standard deviation that is 15% higher than the standard deviation of the gasoline futures price change. What is the company's exposure measured in gallons of the new fuel? What position measured in gallons should the company take in gasoline futures? How many gasoline futures contracts should be traded? Each futures contract is written on 1000 gallons of gasoline.

Homework Answers

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
A company wishes to hedge its exposure to a new fuel whose price changes have a...
A company wishes to hedge its exposure to a new fuel whose price changes have a 0.7 correlation with gasoline futures price changes. The company will lose $500,000 for each 1 percent increase in the price per gallon of the new fuel over the next three months. The new fuel's price change has a standard deviation that is 100% greater than price changes in gasoline futures prices. How many gasoline futures contracts should be traded (one gasoline futures contract represents...
Suppose that the standard deviation of monthly changes in the price of jet fuel is $2....
Suppose that the standard deviation of monthly changes in the price of jet fuel is $2. The standard deviation of monthly changes in crude oil (which is similar to jet fuel) is $3. The correlation between jet fuel and crude oil is 0.9. What position in crude oil futures should be used by Southwest to hedge the purchase of 50,000 gallons of jet fuel at the end of one month. The multiplier for crude oil futures contracts is 1,000. Group...
A company wishes to use financial futures to hedge its interest rate exposure. The company will...
A company wishes to use financial futures to hedge its interest rate exposure. The company will sell 10 Treasury futures contracts at $6.7k per contract. It is Jul and the contracts must be closed out in Dec of this year. Long-term interest rates are currently 13.28%. If they increase to 14.75%, assume the value of the contracts will go down by 4%. Also if interest rates do increase by 1.35%, assume the firm will have additional interest expense on its...
A company wishes to use financial futures to hedge its interest rate exposure. The company will...
A company wishes to use financial futures to hedge its interest rate exposure. The company will sell 10 Treasury futures contracts at $6.3k per contract. It is Jul and the contracts must be closed out in Dec of this year. Long-term interest rates are currently 13.34%. If they increase to 14.92%, assume the value of the contracts will go down by 1.2%. Also if interest rates do increase by 1.02%, assume the firm will have additional interest expense on its...
A company wishes to use financial futures to hedge its interest rate exposure. The company will...
A company wishes to use financial futures to hedge its interest rate exposure. The company will sell five Treasury futures contracts at $126,000 per contract. It is July and the contracts must be closed out in December of this year. Long-term interest rates are currently 14.30%. If they increase to 15.50%, assume the value of the contracts will go down by 15%. Also, if interest rates do increase by 1.20%, assume the firm will have additional interest expense on its...
A company wishes to use financial futures to hedge its interest rate exposure. The company will...
A company wishes to use financial futures to hedge its interest rate exposure. The company will sell 10 Treasury futures contracts at $137k per contract. It is Jul and the contracts must be closed out in Dec of this year. Long-term interest rates are currently 13.2%. If they increase to 14.52%, assume the value of the contracts will go down by 5%. Also if interest rates do increase by 1.25%, assume the firm will have additional interest expense on its...
Suppose that the standard deviation of monthly changes in the price of commodity A is 2.58....
Suppose that the standard deviation of monthly changes in the price of commodity A is 2.58. The standard deviation of monthly changes in a futures price for a contract on commodity B (which is similar to commodity A) is 3.15. The correlation between the futures price and the commodity price is 0.86. Value of your commodity position is $2.8 million, and the value of a futures contract is $40,000. What strategy should you follow to hedge your exposure?   Answer: Short...
Suppose that the standard deviation of monthly changes in the price of commodity A is $1.3....
Suppose that the standard deviation of monthly changes in the price of commodity A is $1.3. The standard deviation of monthly changes in a futures price for a contract on commodity B (which is similar to commodity A) is $7.5. The R-square of a regression of change in commodity prices on the change in futures price is 81%. What hedge ratio should be used when hedging a one month exposure to the price of commodity A? Answer: 0.16
You are a futures trader at Kantar Trading Company, New York. You have the following information...
You are a futures trader at Kantar Trading Company, New York. You have the following information on Lean Hog. The standard deviation of monthly changes in the spot price of Lean Hog Futures is (in cents per pound) 5. The standard deviation of monthly changes in the futures price of Lean Hog Futures the closest contract is 8. The correlation between the futures price changes and the spot price changes is 0.8. It is now December 17, 2019. Your client,...
An investor holds a bond portfolio with principal value $10,000,000 whose price and modified duration are...
An investor holds a bond portfolio with principal value $10,000,000 whose price and modified duration are respectively 112 and 9.21. He wishes to be hedged against a rise in interest rates by selling futures contracts written on a bond. Suppose the price of the cheapest-to-deliver issue is 105.2. The nominal amount of the futures contract is $100,000. The conversion factor for the cheapest-to-deliver is equal to 0.981. The cheapest-to-deliver has a modified duration equal to 8. Additionally, assume that if...