CME Exchange
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Free InquiryYou work for BudgetAir, a small airline company specialized in South Florida‐Caribbean Isles routes. Over the next month the company’s planes will consume $1.5 million gallons of jet fuel, yet to be purchased. The company has already sold tickets for the next month, though the revenue from the tickets sold have not entered its bank accounts yet. The company is worried that its operating costs might increase. It decides to use heating oil futures to hedge its exposure. The spreadsheet Assignment 1 – Hedge Data has 15 months of data on the change in jet fuel price per gallon and the corresponding change in the futures price per gallon for heating oil (for the contract that would be used for hedging price changes during the next month). Each heating oil contract in the CME Exchange is on 42,000 gallons of heating oil.
a. Should the company enter a long or a short position in heating oil futures? b. How many contracts should the company trade? c. The company could use crude oil futures instead of heating oil futures for hedging. What is the most
important number you should calculate to determine whether crude oil futures provide a more effective hedging vehicle for your company compared to heating oil futures?
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