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Contract for the rbob gasoline futures contract

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Reference no: EM133120201

A cruising company expects to purchase 1 million gallons of diesel fuel in eight weeks and decides to use reformulated blendstock for oxygenate blending (RBOB) gasoline futures for hedging against a rise in the price of diesel fuel. Based on price data for the prices of diesel fuel and RBOB futures, the following were estimated:

σS = 0.0981 σF = 0.1622 where σS and σF are the standard deviation of the price of diesel fuel and RBOB gasoline futures, respectively, and ρ is the correlation in the price changes for diesel fuel and RBOB gasoline futures.

The contract for the RBOB gasoline futures contract (traded on the New York Mercantile Exchange) specifies the delivery of 42,000 gallons of RBOB gasoline.

a. Should the cruising company pursue a long hedge or a short hedge?

b. Based on ρ, do you think that RBOB gasoline futures would be a good futures contract to hedge diesel fuel prices?

c. What is the hedge ratio?

d. What is the optimal number of contracts and be sure to specify if it is a long or short position?

e. Suppose that the cruising company erred and instead used 1 for the hedge ratio. How would that change the position in the futures contract?

Reference no: EM133120201

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