A company wishes to hedge its exposure to a new fuel whose price changes have...
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A company wishes to hedge its exposure to a new fuel whose price changes have a 0.95 correlation coefficient with gasoline futures price changes. The company will make $5,000 for each 5 cent increase in the price per gallon of the new fuel over the next three months. The new fuel's price change has a standard deviation that is 20% higher than the standard deviation of the gasoline futures price change. What is the company's exposure measured in gallons of the new fuel? What position measured in gallons should the company take in gasoline futures? How many gasoline futures contracts should be traded? Each futures contract is written on 2000 gallons of gasoline.
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