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Financial Risk Manager Part 1

Financial Risk Manager Part 1

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An analyst at a logistics company is asked to recommend an appropriate hedging strategy using heating oil futures to hedge the volume of jet fuel required by its cargo planes. The analyst gathers the following relevant information about the spot price of jet fuel and the price of the appropriate heating oil futures contract:

  • Variance of the change in spot jet fuel prices: 0.0016
  • Variance of the change in heating oil futures prices: 0.0009
  • Correlation between change in spot jet fuel and heating oil futures prices: 0.8

What is the analyst's best estimate for the optimal hedge ratio?

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