What would be the optimal number of contracts for refiner

Reference no: EM131970457

Problem

A refiner, for the next two months, has exposure to 3.562 million gallons of ethanol for mixture with gasoline to create a blended fuel. Ethanol is traded on the NYNEX with contract size specifications of 29,000 gallons for each contract. The standard deviations for ethanol and futures contracts on ethanol are .72 and .82 respectively while the correlation coefficient is .75. What would be the optimal number of contracts for the refiner to hedge with?

Reference no: EM131970457

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