hard · FRM Part 1 Financial Markets and Products
A risk manager is hedging a bespoke portfolio of jet fuel exposure totaling 5,000,000 gallons using heating oil futures. The standard deviation of monthly price changes for jet fuel is 0.032, while for heating oil futures it is 0.040. The correlation between the two is 0.92. If one heating oil contract covers 42,000 gallons, calculate the optimal number of contracts (N^*) for a minimum-variance hedge.
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