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solution

The following information corresponds to Question 16 and 17. An airline company knows that it will need to purchase 5,000 metric tons of jet fuel in three months. It seeks protection against an upturn in prices using futures contracts. As there is no futures contract on jet fuel, the company refers to heating oil instead. The company can hedge using heating oil futures contracts traded on NYME and the notional for one contract is 42,000 gallons. The current price of jet fuel is $277/metric ton. The futures price of heating oil is $0.6903/gallon. Additionally, you are given the regression results below. Linear Regression Results for Airline Risk Management The dependent variable is the quarterly return on jet fuel price, while the independent variable is the quarterly return on the heating oil futures contract. Dependent variable: Jet Fuel Heating Oil 1.065*** (0.101 Constant 0.007 (0.016) Observations R? Adjusted RP Residual Std. Error F Statistic 20 0.862 0.854 0.070 (df = 18) 111.980*** df = 1; 18) Note: *p<0.1; **p<0.05; ***p<0.01 6 16. How many futures contracts the airline company needs to long/short?

(a) Long 117 contracts

(b) Long 51 contracts

(c) Short 90 contracts

(d) Long 90 contracts 17. What is the standard deviation of the hedged fuel cost in dollars?

(a) $15.3K
(b) $94.6K
(c) $11.2K
(d) $82.2K

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