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What is the company exposure measured in gallons

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An airline wants to hedge its exposure to jet fuel whose price changes have a 0.5 correlation with gasoline futures price changes. The airline will lose $0.25 million for each 1 cent increase in the price per gallon of the jet fuel over the next six months. The jet fuel price changes have a standard deviation that is 30% greater than price changes in gasoline futures prices.

a. If gasoline futures are used to hedge the exposure, what should the hedge ratio be?

b. What is the company's exposure measured in gallons of the jet 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.

Reference no: EM132797024

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