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Suppose a trader is trying to cross hedge an exposure to jet fuel using gasoline futures...

  1. Suppose a trader is trying to cross hedge an exposure to jet fuel using gasoline futures contract. Assume that the standard deviation of the change in the price of jet fuel is $0.5 and the standard deviation of the change in the price of gasoline futures is $0.8 over the lifetime of hedge. Further, the correlation between the changes in the price of jet fuel and the price of gasoline futures is 0.8. What is the optimal hedge ratio that minimized the variance of hedge portfolio?

    A. 0.5 B. 1.28 C. 0.8 D. 1 E. 1.1

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ANSWER = A. 0.5

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