Futures Contracts and Hedging Strategy
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Futures Contracts and Hedging Strategy
About the assignment: Assume that you were approached by the CFO of USC Airlines, an established hypothetical airline, in your capacity as a Risk Analyst who is familiar with Derivative products.
The CFO is debating the effectiveness and business viability of hedging jet fuel and is seeking your advice. Her opinion is mainly driven by an international report that shows that not all airlines hedge jet fuel.
Question: The CFO appreciates a concrete hedging analysis to validate your advice. (hedge or not hedge). not hedge
A data set is collected from trading platforms and is provided for:
- Spot market Jet Fuel,
- HO1 Commodity (Future), and
- CO1 Commodity (Future).
See the data file in Excel. The file contains a description of the data series as if you are accessing the market yourself.
2 a- Calculate and interpret the minimum variance hedge ratio for each of the future commodity. Use the OLS method and comment on the significance of the results. (Support files for using regressions in OLS are provided)
2 b- Discuss whether differences in the hedge ratio between the two commodities will have any effect on the effectiveness of the hedge.
2 c- Recommend a convenient hedging strategy to the CFO using the data provided and explain the corresponding hedging position.
2 d- What are the potential factors that may weaken your suggested strategy. Discuss in
(Calculations do not count as words) 1000 words
Grading Rubric
Your assignment will be graded based on the following rubric:
Category Unacceptable (0-1) Needs Improvement (2-3) Good (4) Excellent (5) Total Possible Points Organization (x3) There is no apparent organization to the answers. They shows some coherence but ideas lack unity. There is some level of organization though digressions, ambiguities, irrelevance are too many. Transition evident but not used throughout the paper. Answers are coherent and logically organized with transitions used between ideas and paragraphs to create coherence. Overall unity of ideas is present. Answers show high degree of attention to logic and reasoning of points. Unity clearly leads the reader to the conclusion and stirs thought regarding the topic. 15 Content (x3) Answers lack evidence of critical thinking. Writer uses superficial, simplistic, or irrelevant reasons and unjustifiable claims. Makes illogical, inconsistent inference. Answers are primarily opinion without valid support. Little critical thinking is evident. Follows existing evidence to obtain conclusions. Ideas are logical and reasoned, but demonstrate lesser degree of originality. Follows evidence and reason lead to obtain justifiable, logical conclusion. Writer develops logical and reasoned independent ideas that go beyond predictable outcomes or the conclusions of researched materials. Follows where evidence and reason lead in order to obtain defensible, thoughtful, logical conclusions or solutions. 15 Grammar & Mechanics(x2) Sentences are unclear and many grammatical errors in structure make answers virtually unreadable. Spelling, punctuation, capitalization, and vocabulary usage contain major flaws that impede readability. Most spelling, punctuation, and grammar correct allowing reader to progress through the answers. Some errors remain. Answers have few spelling, punctuation, and grammatical errors allowing reader to follow ideas clearly. Very few fragments or run-ons. Answers are free of distracting spelling, punctuation, and grammatical errors; absent of fragments, comma splices, and run-ons. 5 Futures Contracts and Hedging Strategy
RUBRIC
Excellent Quality
95-100%
Introduction 45-41 points
The background and significance of the problem and a clear statement of the research purpose is provided. The search history is mentioned.
Literature Support
91-84 points
The background and significance of the problem and a clear statement of the research purpose is provided. The search history is mentioned.
Methodology
58-53 points
Content is well-organized with headings for each slide and bulleted lists to group related material as needed. Use of font, color, graphics, effects, etc. to enhance readability and presentation content is excellent. Length requirements of 10 slides/pages or less is met.
Average Score
50-85%
40-38 points
More depth/detail for the background and significance is needed, or the research detail is not clear. No search history information is provided.
83-76 points
Review of relevant theoretical literature is evident, but there is little integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are included. Summary of information presented is included. Conclusion may not contain a biblical integration.
52-49 points
Content is somewhat organized, but no structure is apparent. The use of font, color, graphics, effects, etc. is occasionally detracting to the presentation content. Length requirements may not be met.
Poor Quality
0-45%
37-1 points
The background and/or significance are missing. No search history information is provided.
75-1 points
Review of relevant theoretical literature is evident, but there is no integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are not included in the summary of information presented. Conclusion does not contain a biblical integration.
48-1 points
There is no clear or logical organizational structure. No logical sequence is apparent. The use of font, color, graphics, effects etc. is often detracting to the presentation content. Length requirements may not be met
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Futures Contracts and Hedging Strategy