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, 23 March, 2018 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 shouldn’t 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, Hedging Data-2018.xls, contains spot prices for jet kerosene, S (column B)
and futures prices for crude oil, F (column C) for a period from 7/03/2016 to 1/03/2018.

(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. (Leave cells D3 and E3 blank.)
(b) In cell F2 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?
(c) Now we would like to see how estimates of the slope have varied over time. In cell F53, type
=SLOPE(D4:D53,E4:E53). Now COPY this formula and PASTE it into the remaining cells in the
column. (Alternatively, you can drag the formula down; whichever works best for you.) This
will give you a time series of slopes (where each slope is calculated based on 50 daily price
changes.)
(d) Calculate the maximum, minimum, and most recent estimate of the slope based on column F.
Which estimate of h* do you think is the most appropriate to use? (No marks for this
question, but I would like you to think about it.)
(e) Now let us confirm that there is a second way to estimate h*. In cell G2 calculate the standard
deviation of changes in S. Use =stdev(…). Then in cell H2 do the same thing for the futures
prices, F.
(f) In cell I2 calculate the correlation between changes in S and changes in F. Use =correl(…).
(g) In cell J2 use the formula in the lecture notes to calculate the optimal hedge ratio, h*. Use the
formula that uses the above values.
(h) Does your answer in cell J2 agree with your answer in cell F2? (No marks for this question,
but please think about the question, and comment on the spreadsheet if you like.)
(i) 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 (b) 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.