MATBUS470 Lecture Notes - Lecture 3: Basis Risk, Jet Fuel, Spot Contract

• School: University of Waterloo
• Department: Mathematical Business
• Course: MATBUS470
• Professor: Keith Freeland

Document Summary

A long future hedge is appropriate when you know you will purchase the asset in the future and want to lock in the price. A short futures hedge is appropriate when you know you will sell the asset in the future and want lock in the price. Allows companies to focus on their main business, without worrying aboutrisksc from interest rates, exchange rates, other market variable. Basis is usually de ned as the spot price minus the futures price hedge for heating oil , which moves together with jet fuel lower price/ fuel cost. Shareholders are usually well diversi ed and can make their own hedging decisions. It may increase risk when competitor do not hedge. It is di cult to explain why there is a loss on the hedge and a gain on the underlying asset. Basis are getting smaller when time get closer to the delivery time.