An airline expects to purchase 2 million gallons of jet fuel in 1 month and decides to use heating oil futures for hedging.
The variance of the heating oil futures price is 1,5 times bigger then the variance of the price of the jet fuel. The correlation between the spot jet fuel price and the 3 month heating oil futures price is 0.5.
Question a) Does the airline take a long or a short position in the futures contract?
Am in long or short position in oil heating futures? The answer is long, in my book, but I don't understand why.
I am in long in jet fuel, so why am I also long heat oil?
Can someone explain, how this works? Thank you!