homework explanations

homework explanations - #1c. Based on the correlations, we...

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#1c. Based on the correlations, we could use the heating oil futures as they are more highly correlated to the changes in spot price of the crude oil than the propane futures. Overall, a majority of the correlations indicate that ragne from a moderate to strong positive correlation, for example, ρ= 0.89261397 between the following: Rotterdam (ARA) Gasoil Spot Price FOB (Cents per Gallon) Los Angeles, CA No 2 Diesel Spot Price FOB (Cents per Gallon) From here we can assume because of the positive correlation they a majority behave in similar patterns. From a statistical point of view, we have a found a possible predictor and one more want to do more analysis if this is a cause and effect relationship. Therefore the heating oil price changes will more closely follow the price changes of crude oil. We would then use the minimum variance hedge ratio (h*) we calculated to determine the number of heating oil contracts needed to appropriately hedge our crude oil exposure. This was also calculated by using linearly regressing each change in the futures
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homework explanations - #1c. Based on the correlations, we...

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