Suppose that you will be delivering 150,000 barrels of crude oil in February. Currently the Feburary...
Suppose that you will be delivering 150,000 barrels of crude oil in February. Currently the Feburary WTI contract is at $51.04 per barrel. The oil you will deliver isn't exactly WTI. Based on historical data you estimate that the change in the WTI spot price and the change in the spot price of the grade you will deliver have the same standard deviation but the correlation between these price changes is only 0.95. One WTI futures contract is for 1,000 barrels. What position do you take in WTI futures to get the best hedge?
Homework Answers
Optimal hedge ratio = correlation * SDspot/SDfuture
Optimal ratio = .95 [since the SD is equal]15
No of contracts = Hedge ratio * Total quantity/Size of contract
= .95 * 150000/1000 = 142.5 or 143 contracts
To hedge it should purchase 143 WTI future contracts.
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