FINS 3635 Computer Assignment

For this assignment, you must submit your answers individually; this is not a group assignment.
The due date for the assignment is Friday, 18 August, 2017 by 11pm, through Assignment on
Moodle. For this assignment you should only have to submit your final spreadsheet. If you feel you
need to make additional comments, you may also submit a Word document, but it shouldnt be
necessary.

Introduction
The purpose of this assignment is to have you calculate an Optimal Hedge Ratio using real data. See
Ch. 3, slides 34 to 44.

The Data: The spreadsheet, Oil Futures Data-2017-2.xls, contains spot prices, S (column B) and futures
prices, F (column C) for a period from 6/03/2015 to 7/03/2017.

(a) In column D calculate the daily changes in the spot prices, S, i.e., St St 1. Then, in column E
do the same thing for futures prices, F.
(b) In cell F2 calculate the standard deviation of changes in S. Use =stdev(). Then in cell G2 do
the same thing for F.
(c) In cell H2 calculate the correlation between changes in S and changes in F. Use =correl().
(d) In cell I2 use the formula in the lecture notes to calculate the optimal hedge ratio, h*. Use the
formula that uses the above values.
(e) In cell J2 use the regression interpretation of h* (starting on slide 3-42 of the notes) to
calculate the appropriate slope. Use the Excel command =slope(). You should be able to
use the Excel prompts to figure out how to use the slope command, and read the notes to see
which variable is x and which is y in the regression. Which column represents the y variable?
(f) Does your answer in cell J2 agree with your answer in cell I2? (No marks for this question, but
please think about the question, and comment on the spreadsheet if you like.)
(g) Suppose your firm wants to hedge the purchase of 1,000,000 barrels of oil in three months.
Using your estimate of h* from part (e) above, how many contracts should you buy/sell in
order to hedge this future purchase? Each contract is for 1,000 barrels of oil. Enter your
answer in cell K2.
(h) In cell L2 re-estimate the slope using the data from row 250 to the end of the data.
(i) In cell M2 re-estimate the slope using the data from row 270 to the end of the data.
(j) Are the estimates in cells L2 and M2 the same?
(k) In cell N2, calculate the number of contracts using the slope from cell M2.
(l) Any comments about why the three estimates look like this? Which estimate do you think we
should use? (No marks for this question, but comment if you like.)