This paper circulates around the core theme of A company wishes to hedge its exposure to a new fuel whose price changes have a 0.6 correlation with gasoline futures price changes. The company will lose $1 million for each1 cent increase in the price per gallon of the new fuel over the next three month together with its essential aspects. It has been reviewed and purchased by the majority of students thus, this paper is rated 4.8 out of 5 points by the students. In addition to this, the price of this paper commences from £ 99. To get this paper written from the scratch, order this assignment now. 100% confidential, 100% plagiarism-free.
A company wishes to hedge its exposure to a new fuel whose price
changes have a 0.6 correlation with gasoline futures price changes. The
company will lose $1 million for each1 cent increase in the price per
gallon of the new fuel over the next three months. The new fuel’s price
changes have a standard deviation that is 50% greater than price changes
in gasoline futures prices. Gasoline futures are used to hedge the
exposure of the company.
a)What should the hedge ratio be?
b) What is the company’s exposure measured in gallons of the new fuel?
c) What position, measured in gallons, should the company take in gasoline futures?
d) How many gasoline futures contracts should be traded? Each contract is on 42,000 gallons.
