- Tell me the slope of the forward curve if storage costs are greater than the risk free rate. 2) How would I go about working out how to hedge jet fuel with crude oil futures. 3) Max[0, Average Daily Temp - 65F] - am I hedging with heating or cooling days?
- Upward sloping. If convenience yield was greater than rf+storage cost, then the curve would slope downward. 2. There is no perfect hedge in this market, but you can use oil futures as a proxy and take a long position or you can speculate in crack spreads and earn a return depending on your views on output vs input pricing. 3. You bought protection on rising temperatures, so you are hedging heating days with cooling days.
1 upward 2 long crude short fuel and heating 3 cooling
- Upward sloping. 2. poorly is the answer. need to know the crack spread as in how many units of crude used to produce how many units of jet fuel and anything else and buy futures accordingly with massive basis risk. 3. The hotter the day the more the pay off. This is a call on temp with 65 strike. you are hedged against cold days
- If storage costs greater than backwardated i.e. downward forward curve ( what any commodity investor likes , because of +ve roll yield) 2. Regress jet fuel and crude returns and work out the hedge ratio? covariance( crude , jet)/variance of crude futures 3. cooling degree days
- Upward sloping curve since you need to compensate for storage costs 2) Buy futures and go long, but determine how many according to the crack spread for your specific fuel? Not too sure what the question is asking. 3) You are hedging for heating days because your business probably benefits from cool days… you probably are a snowblowing company or something.
Question 3 wording is off which is why I wrote my answer the way I did. Are you asking what we are hedging with or what we are hedging against?
excatly bulldawg i was thinking the same, i would say ur hedged against hot days
Upward Crack spread If you benefit when it gets hot, then aren’t you hedged AGAINST HOT days
Against, sorry - hot days Answers: 1) Upward sloping 2) Regression of jet fuel returns on crude oil returns - use the slope coefficient as the hedge ratio. 3) Hedging against hot days. That is get paid if it’s hot.
soddy1979 Wrote: ------------------------------------------------------- > Against, sorry - hot days > > Answers: > > 1) Upward sloping > 2) Regression of jet fuel returns on crude oil > returns - use the slope coefficient as the hedge > ratio. > 3) Hedging against hot days. That is get paid if > it’s hot. NM already explained. This is also an errata in Schweser if memory serves me right.