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give me answer as detail as possible – FINA 4350 PROF NARDARI Spring 2012 Homework Set #2 Due on Monday, March 5th.

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FINA 4350 PROF NARDARI
Spring 2012
Homework Set #2
th.
Due on Monday, March 5 before class

Please, type your answers. Handwritten assignments will be penalized. You will
have to submit a hard copy of your write-up. In the write-up please provide all the
necessary details of you work. List all contributing group members legibly on the
first page of your submission. Submit one write-up per group. Thank you for your
cooperation.
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1) Please download the file HW2_HeatingOilFutures.xls. It contains weekly prices (in
US$ per gallon) for NYMEX futures contracts on Heating Oil. You want to use such
futures contracts (contract size is 42,000 gallons) to hedge the price risk of jet fuel for a
position of 10 million gallons you will need to acquire. In order to determine the hedging
strategy you need to analyze the dynamics of jet fuel and heating oil prices. Hence, you
first need to collect data on spot jet fuel prices. Go to the EIA website at
http://www.eia.gov/dnav/pet/pet_pri_spt_s1_w.htm and download weekly data (select
“Weekly” for Period and click on the “Download Series History” link). Notice that the
Excel file you will download from the EIA website contains several price series: you will
need to extract the Kerosene-Type Jet Fuel from the U.S. Gulf Coast. Armed with the
spot and the futures data you will need to run a regression analysis in order to determine
the optimal hedge ratio. For the analysis, your experience suggests that one should rely
on the last 5-6 years of data: hence, you decide to use only the data starting in January of
2006 and ending in February 2012. Using the estimated hedge ratio you, then, need to
determine what position in futures contracts you need to take in order to optimally hedge.
Be precise about the sign of your position in futures (long or short) and the number of
heating oil NYMEX contracts you need to trade. Also, explain the…

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