Questions 1)Using the 24 months of data provided, determine the effect

on overall cost and the standard deviation of average monthly price per litre if the Wing hedged 50% of its fuel usage. Assume all derivative purchases were made quarterly and positions were established for threemonth periods. For example, if average usage per month were 84,000 gallons, hedging 50% of usage for three months would be 126,000 gallons. a. Three-month No 2 heating oil futures contracts. b. Three-month No. 2 Heating Oil call options. 2. What is the significance of the results obtained in question 1 given the following possible goals of a hedging strategy and what recommendations would you make for each of the strategies pursued. a. Minimize overall cost. b. Minimize standard deviation. 3. If the Air Force decided to pursue a fuel hedging strategy and selected forward contracts as the derivative tool to be used, in what market would they find these types of contracts traded? What factors would have to be considered in formulating the contract? How would the specifications of the contract be determined and what do you think would be important for the Air Force in establishing such a contract? 4. Duffield has selected New York No 2 Heating Oil as a suitable alternative commodity to hedge against fluctuations in the price of aviation fuel used by the Wing. Given the data presented, what is the significance of the basis risk faced during the period of study? What impact does the exchange risk have on the hedging strategies and what options would you recommend to mitigate this risk?

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