(a) What is meant by a basis risk? What is the relationship between the futures...
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(a) What is meant by a basis risk? What is the relationship between the futures price and the spot price at the expiration (or maturity) of the futures contract? (b) Blue Jet Airlines expects to purchase 3 million gallons of jet fuel in a month, and decides to use heating oil futures to hedge. Using past monthly data, the standard deviation of the change in spot price of jet fuel is found to be 0.0446, and the standard deviation of the heating oil futures price is obtained as 0.0514. The correlation between the spot and futures prices is found to be 0.89. Also, each heating oil contract traded the New York Mercantile Exchange (NYMEX) is on 42.000 gallons of heating oil. What is the optimal number of futures contracts (round to nearest whole numberand indicate whether long or short) that Sky airlines should use to hedge its position of purchasing jet fuel in a month
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