Midwest Airlines is short 2 million gallons of jet fuel. Since no jet fuel contract exists, they decide to hedge with crude oil futures. One 42 barrel of crude oil is needed to produce 20 gallons of jet fuel. If one contract is for 1,000 barrels, how many crude oil contracts will they need to properly hedge their exposure?

Question

Quizplus · Accepted Answer

To hedge 2 million gallons of jet fuel, they need 2 million / 20 = 100,000 barrels of crude oil. Since each contract is for 1,000 barrels, they need 100,000 / 1,000 = 100 contracts. However, there seems to be a mistake in the options provided, as none of them match the correct calculation.

Midwest Airlines Is Short 2 Million Gallons of Jet Fuel