Question:

You are a manager of a superannuation fund which has $50M invested in Woodside (WPL) and $20M invested in Santos (STO). You have seen the roller-coaster ride in their prices in the past few years along with the oil price, and you have calculated the correlations between your portfolio value and the daily movements of oil prices and exchange rates. You are worried now that the oil price may drop again from its present levels, and you want to protect your portfolioâs value to some reasonable extent, while minimising the cost.

I got all the data, I calculated the correlations between the portfolio and the daily movements of oil prices and exchange rates. Can someone help me with some of the best hedging strategies for this situation while minimising the cost.

Frequency: Monthly

STO WPL PORFOLIO WTI EX. RATE AUD-US

Weight 0.285714 Weight 0.714286

Date Adj Close Date Adj Close observation_date Adj Close Adj Close x Ex. Rate (AUD) Date Last Price AUD_US US__AUD

31/05/2012 9.27512 31/05/2012 31.02 24.80717714 2012-06-01 82.30 84.55 31/05/2012 0.9734 1.0273269 correlation STO & WPL

30/06/2012 9.36221 30/06/2012 33.75 26.78206 2012-07-01 87.90 85.86 29/06/2012 1.0238 0.97675327 0.877567

31/07/2012 9.78024 31/07/2012 34.3 27.29435357 2012-08-01 94.13 89.62 31/07/2012 1.0503 0.95210892

31/08/2012 9.89346 31/08/2012 33.14 26.49813071 2012-09-01 94.51 91.56 31/08/2012 1.0322 0.9688045 correlation WPL & WTI (w. ex. Rate added)

30/09/2012 10.0241 30/09/2012 34.4 27.43545857 2012-10-01 89.49 86.23 28/09/2012 1.0378 0.9635768 0.843472

31/10/2012 9.70186 31/10/2012 33.8 26.91481643 2012-11-01 86.53 83.39 31/10/2012 1.0376 0.96376253

30/11/2012 9.66703 30/11/2012 33.88 26.96200929 2012-12-01 87.86 84.25 30/11/2012 1.0428 0.95895666 Correlation STO & WTI (w. ex. Rate added)

31/12/2012 10.416 31/12/2012 35.47 28.311715 2013-01-01 94.76 91.17 31/12/2012 1.0394 0.96209352 0.938628

31/01/2013 11.6788 31/01/2013 37.5 30.12251429 2013-02-01 95.31 91.42 31/01/2013 1.0425 0.95923261

28/02/2013 10.8253 28/02/2013 35.82 28.67865714 2013-03-01 92.94 90.98 28/02/2013 1.0215 0.97895252 Correlation Portfolio & WTI

31/03/2013 10.7557 31/03/2013 37.56 29.90162929 2013-04-01 92.02 88.32 29/03/2013 1.0419 0.95978501 0.873927

30/04/2013 11.3914 30/04/2013 35.99 28.96183 2013-05-01 94.51 91.13 30/04/2013 1.0371 0.96422717

31/05/2013 10.9124 31/05/2013 35.01 28.12497 2013-06-01 95.77 100.06 31/05/2013 0.9571 1.0448229 Correlation Portfolio & WTI (w. ex. Rate added)

30/06/2013 11.9052 30/06/2013 37.59 30.25148571 2013-07-01 104.67 114.54 28/06/2013 0.9138 1.09433136 0.886146

31/07/2013 12.9939 31/07/2013 38.18 30.98397143 2013-08-01 106.57 118.65 31/07/2013 0.8982 1.11333779

31/08/2013 13.1332 31/08/2013 38.31 31.11662929 2013-09-01 106.29 119.41 30/08/2013 0.8901 1.12346927 Portfolio with FX US_AUD

30/09/2013 13.2116 30/09/2013 38.82 31.50331429 2013-10-01 100.54 107.91 30/09/2013 0.9317 1.07330686 -0.7285

31/10/2013 12.1926 31/10/2013 37.4 30.19788714 2013-11-01 93.86 99.26 31/10/2013 0.9456 1.05752961

30/11/2013 12.7413 30/11/2013 38.9 31.42608714 2013-12-01 97.63 107.19 29/11/2013 0.9108 1.09793588 Correlation Portfolio & FX AUD_US

31/12/2013 11.6179 31/12/2013 37.38 30.01940071 2014-01-01 94.62 106.11 31/12/2013 0.8917 1.1214534 0.672549

31/01/2014 11.8791 31/01/2014 37.95 30.50117214 2014-02-01 100.82 115.14 31/01/2014 0.8756 1.14207401

28/02/2014 11.7572 28/02/2014 39.02 31.23062857 2014-03-01 100.80 112.95 28/02/2014 0.8924 1.12057373

31/03/2014 11.9749 31/03/2014 40.8 32.56425643 2014-04-01 102.07 110.18 31/03/2014 0.9264 1.07944732

30/04/2014 12.6455 30/04/2014 42.17 33.73442714 2014-05-01 102.18 110.02 30/04/2014 0.9287 1.07677399

31/05/2014 12.4191 31/05/2014 41.07 32.88402857 2014-06-01 105.79 113.63 30/05/2014 0.931 1.07411386

30/06/2014 12.6804 30/06/2014 42.52 33.9944 2014-07-01 103.59 109.82 30/06/2014 0.9433 1.06010813

31/07/2014 12.9155 31/07/2014 42.7 34.19014357 2014-08-01 96.54 103.86 31/07/2014 0.9295 1.07584723

31/08/2014 11.9052 31/08/2014 40.6 32.40148429 2014-09-01 93.21 99.81 29/08/2014 0.9339 1.07077846

30/09/2014 11.2346 30/09/2014 40.13 31.87417214 2014-10-01 84.40 96.49 30/09/2014 0.8747 1.14324911

31/10/2014 8.79612 31/10/2014 35.75 28.04889143 2014-11-01 75.79 86.14 31/10/2014 0.8798 1.13662196

30/11/2014 7.18495 30/11/2014 38.01 29.20284143 2014-12-01 59.29 69.70 28/11/2014 0.8506 1.17564072

31/12/2014 6.86272 31/12/2014 34.28 26.44649071 2015-01-01 47.22 57.76 31/12/2014 0.8175 1.22324159

31/01/2015 6.91497 31/01/2015 35.18 27.10427714 2015-02-01 50.58 65.16 30/01/2015 0.7762 1.28832775

28/02/2015 6.21825 28/02/2015 34.52 26.43378571 2015-03-01 47.82 61.24 27/02/2015 0.7808 1.2807377

31/03/2015 7.2285 31/03/2015 35.05 27.10099929 2015-04-01 54.45 71.58 31/03/2015 0.7607 1.31457868

30/04/2015 7.18495 30/04/2015 36.63 28.21712929 2015-05-01 59.27 74.98 30/04/2015 0.7905 1.26502214

31/05/2015 6.81917 31/05/2015 34.23 26.39833429 2015-06-01 59.82 78.25 29/05/2015 0.7645 1.30804447

30/06/2015 6.44469 30/06/2015 35.65 27.30562714 2015-07-01 50.90 66.04 30/06/2015 0.7707 1.29752173

31/07/2015 4.46773 31/07/2015 30.97 23.39792214 2015-08-01 42.87 58.66 31/07/2015 0.7308 1.36836344

31/08/2015 3.98 31/08/2015 28.93 21.80142857 2015-09-01 45.48 63.94 31/08/2015 0.7113 1.40587656

30/09/2015 5.08608 30/09/2015 29.61 22.60316643 2015-10-01 46.22 65.86 30/09/2015 0.7018 1.42490738

31/10/2015 4.01 31/10/2015 30.11 22.65285786 2015-11-01 42.44 59.46 30/10/2015 0.7138 1.40095265

30/11/2015 3.68 30/11/2015 28.72 21.56571357 2015-12-01 37.19 51.46 30/11/2015 0.7227 1.38370001

31/12/2015 3.16 31/12/2015 27.95 20.86714357 2016-01-01 31.68 43.48 31/12/2015 0.7286 1.3724952

31/01/2016 3.31 31/01/2016 28.1 21.01714286 2016-02-01 30.32 42.80 29/01/2016 0.7084 1.41163185

29/02/2016 4.03 29/02/2016 25.96 19.694285 2016-03-01 37.55 52.58 29/02/2016 0.7141 1.40036409

31/03/2016 4.8 31/03/2016 28.34 21.61428571 2016-04-01 40.76 53.23 31/03/2016 0.7657 1.30599451

30/04/2016 4.53 30/04/2016 27.4 20.86571429 2016-05-01 46.71 61.44 29/04/2016 0.7603 1.31527029

31/05/2016 4.64 31/05/2016 26.84 20.49714286 2016-06-01 48.76 67.40 31/05/2016 0.7234 1.38236107

30/06/2016 4.39 30/06/2016 26.53 20.20428643 2016-07-01 44.65 59.92 30/06/2016 0.7451 1.34210173

31/07/2016 4.44 31/07/2016 28.63 21.71857071 2016-08-01 44.72 58.87 29/07/2016 0.7596 1.31648236

31/08/2016 3.61 31/08/2016 28.62 21.47428643 2016-09-01 45.18 60.10 31/08/2016 0.7517 1.33031795

30/09/2016 3.57 30/09/2016 28.37 21.28428643 2016-10-01 49.78 64.95 30/09/2016 0.7664 1.30480167

31/10/2016 3.93 31/10/2016 29.62 22.28000071 2016-11-01 45.66 60.01 31/10/2016 0.7609 1.31423314

30/11/2016 4.02 30/11/2016 31.16 23.40571429 2016-12-01 51.97 70.37 30/11/2016 0.7385 1.35409614

31/12/2016 4 31/12/2016 31.56 23.68571357 2017-01-01 52.50 72.84 30/12/2016 0.7208 1.38734739

31/01/2017 3.8 31/01/2017 31.34 23.47142857 2017-02-01 53.47 70.49 31/01/2017 0.7585 1.31839156

28/02/2017 3.8 28/02/2017 32.08 24.00000143 2017-03-01 49.33 64.42 28/02/2017 0.7657 1.30599451

31/03/2017 3.48 31/03/2017 32.18 23.98 2017-04-01 51.06 66.93 31/03/2017 0.7629 1.31078778

Question

Question:

You are a manager of a superannuation fund which has $50M invested in Woodside (WPL) and $20M invested in Santos (STO). You have seen the roller-coaster ride in their prices in the past few years along with the oil price, and you have calculated the correlations between your portfolio value and the daily movements of oil prices and exchange rates. You are worried now that the oil price may drop again from its present levels, and you want to protect your portfolioâs value to some reasonable extent, while minimising the cost.

I got all the data, I calculated the correlations between the portfolio and the daily movements of oil prices and exchange rates. Can someone help me with some of the best hedging strategies for this situation while minimising the cost.

					Frequency: Monthly
STO		WPL		PORFOLIO			WTI			EX. RATE AUD-US
Weight	0.285714	Weight	0.714286
Date	Adj Close	Date	Adj Close			observation_date	Adj Close	Adj Close x Ex. Rate (AUD)	Date	Last Price AUD_US	US__AUD
31/05/2012	9.27512	31/05/2012	31.02	24.80717714		2012-06-01	82.30	84.55	31/05/2012	0.9734	1.0273269	correlation STO & WPL
30/06/2012	9.36221	30/06/2012	33.75	26.78206		2012-07-01	87.90	85.86	29/06/2012	1.0238	0.97675327	0.877567
31/07/2012	9.78024	31/07/2012	34.3	27.29435357		2012-08-01	94.13	89.62	31/07/2012	1.0503	0.95210892
31/08/2012	9.89346	31/08/2012	33.14	26.49813071		2012-09-01	94.51	91.56	31/08/2012	1.0322	0.9688045	correlation WPL & WTI (w. ex. Rate added)
30/09/2012	10.0241	30/09/2012	34.4	27.43545857		2012-10-01	89.49	86.23	28/09/2012	1.0378	0.9635768	0.843472
31/10/2012	9.70186	31/10/2012	33.8	26.91481643		2012-11-01	86.53	83.39	31/10/2012	1.0376	0.96376253
30/11/2012	9.66703	30/11/2012	33.88	26.96200929		2012-12-01	87.86	84.25	30/11/2012	1.0428	0.95895666	Correlation STO & WTI (w. ex. Rate added)
31/12/2012	10.416	31/12/2012	35.47	28.311715		2013-01-01	94.76	91.17	31/12/2012	1.0394	0.96209352	0.938628
31/01/2013	11.6788	31/01/2013	37.5	30.12251429		2013-02-01	95.31	91.42	31/01/2013	1.0425	0.95923261
28/02/2013	10.8253	28/02/2013	35.82	28.67865714		2013-03-01	92.94	90.98	28/02/2013	1.0215	0.97895252	Correlation Portfolio & WTI
31/03/2013	10.7557	31/03/2013	37.56	29.90162929		2013-04-01	92.02	88.32	29/03/2013	1.0419	0.95978501	0.873927
30/04/2013	11.3914	30/04/2013	35.99	28.96183		2013-05-01	94.51	91.13	30/04/2013	1.0371	0.96422717
31/05/2013	10.9124	31/05/2013	35.01	28.12497		2013-06-01	95.77	100.06	31/05/2013	0.9571	1.0448229	Correlation Portfolio & WTI (w. ex. Rate added)
30/06/2013	11.9052	30/06/2013	37.59	30.25148571		2013-07-01	104.67	114.54	28/06/2013	0.9138	1.09433136	0.886146
31/07/2013	12.9939	31/07/2013	38.18	30.98397143		2013-08-01	106.57	118.65	31/07/2013	0.8982	1.11333779
31/08/2013	13.1332	31/08/2013	38.31	31.11662929		2013-09-01	106.29	119.41	30/08/2013	0.8901	1.12346927	Portfolio with FX US_AUD
30/09/2013	13.2116	30/09/2013	38.82	31.50331429		2013-10-01	100.54	107.91	30/09/2013	0.9317	1.07330686	-0.7285
31/10/2013	12.1926	31/10/2013	37.4	30.19788714		2013-11-01	93.86	99.26	31/10/2013	0.9456	1.05752961
30/11/2013	12.7413	30/11/2013	38.9	31.42608714		2013-12-01	97.63	107.19	29/11/2013	0.9108	1.09793588	Correlation Portfolio & FX AUD_US
31/12/2013	11.6179	31/12/2013	37.38	30.01940071		2014-01-01	94.62	106.11	31/12/2013	0.8917	1.1214534	0.672549
31/01/2014	11.8791	31/01/2014	37.95	30.50117214		2014-02-01	100.82	115.14	31/01/2014	0.8756	1.14207401
28/02/2014	11.7572	28/02/2014	39.02	31.23062857		2014-03-01	100.80	112.95	28/02/2014	0.8924	1.12057373
31/03/2014	11.9749	31/03/2014	40.8	32.56425643		2014-04-01	102.07	110.18	31/03/2014	0.9264	1.07944732
30/04/2014	12.6455	30/04/2014	42.17	33.73442714		2014-05-01	102.18	110.02	30/04/2014	0.9287	1.07677399
31/05/2014	12.4191	31/05/2014	41.07	32.88402857		2014-06-01	105.79	113.63	30/05/2014	0.931	1.07411386
30/06/2014	12.6804	30/06/2014	42.52	33.9944		2014-07-01	103.59	109.82	30/06/2014	0.9433	1.06010813
31/07/2014	12.9155	31/07/2014	42.7	34.19014357		2014-08-01	96.54	103.86	31/07/2014	0.9295	1.07584723
31/08/2014	11.9052	31/08/2014	40.6	32.40148429		2014-09-01	93.21	99.81	29/08/2014	0.9339	1.07077846
30/09/2014	11.2346	30/09/2014	40.13	31.87417214		2014-10-01	84.40	96.49	30/09/2014	0.8747	1.14324911
31/10/2014	8.79612	31/10/2014	35.75	28.04889143		2014-11-01	75.79	86.14	31/10/2014	0.8798	1.13662196
30/11/2014	7.18495	30/11/2014	38.01	29.20284143		2014-12-01	59.29	69.70	28/11/2014	0.8506	1.17564072
31/12/2014	6.86272	31/12/2014	34.28	26.44649071		2015-01-01	47.22	57.76	31/12/2014	0.8175	1.22324159
31/01/2015	6.91497	31/01/2015	35.18	27.10427714		2015-02-01	50.58	65.16	30/01/2015	0.7762	1.28832775
28/02/2015	6.21825	28/02/2015	34.52	26.43378571		2015-03-01	47.82	61.24	27/02/2015	0.7808	1.2807377
31/03/2015	7.2285	31/03/2015	35.05	27.10099929		2015-04-01	54.45	71.58	31/03/2015	0.7607	1.31457868
30/04/2015	7.18495	30/04/2015	36.63	28.21712929		2015-05-01	59.27	74.98	30/04/2015	0.7905	1.26502214
31/05/2015	6.81917	31/05/2015	34.23	26.39833429		2015-06-01	59.82	78.25	29/05/2015	0.7645	1.30804447
30/06/2015	6.44469	30/06/2015	35.65	27.30562714		2015-07-01	50.90	66.04	30/06/2015	0.7707	1.29752173
31/07/2015	4.46773	31/07/2015	30.97	23.39792214		2015-08-01	42.87	58.66	31/07/2015	0.7308	1.36836344
31/08/2015	3.98	31/08/2015	28.93	21.80142857		2015-09-01	45.48	63.94	31/08/2015	0.7113	1.40587656
30/09/2015	5.08608	30/09/2015	29.61	22.60316643		2015-10-01	46.22	65.86	30/09/2015	0.7018	1.42490738
31/10/2015	4.01	31/10/2015	30.11	22.65285786		2015-11-01	42.44	59.46	30/10/2015	0.7138	1.40095265
30/11/2015	3.68	30/11/2015	28.72	21.56571357		2015-12-01	37.19	51.46	30/11/2015	0.7227	1.38370001
31/12/2015	3.16	31/12/2015	27.95	20.86714357		2016-01-01	31.68	43.48	31/12/2015	0.7286	1.3724952
31/01/2016	3.31	31/01/2016	28.1	21.01714286		2016-02-01	30.32	42.80	29/01/2016	0.7084	1.41163185
29/02/2016	4.03	29/02/2016	25.96	19.694285		2016-03-01	37.55	52.58	29/02/2016	0.7141	1.40036409
31/03/2016	4.8	31/03/2016	28.34	21.61428571		2016-04-01	40.76	53.23	31/03/2016	0.7657	1.30599451
30/04/2016	4.53	30/04/2016	27.4	20.86571429		2016-05-01	46.71	61.44	29/04/2016	0.7603	1.31527029
31/05/2016	4.64	31/05/2016	26.84	20.49714286		2016-06-01	48.76	67.40	31/05/2016	0.7234	1.38236107
30/06/2016	4.39	30/06/2016	26.53	20.20428643		2016-07-01	44.65	59.92	30/06/2016	0.7451	1.34210173
31/07/2016	4.44	31/07/2016	28.63	21.71857071		2016-08-01	44.72	58.87	29/07/2016	0.7596	1.31648236
31/08/2016	3.61	31/08/2016	28.62	21.47428643		2016-09-01	45.18	60.10	31/08/2016	0.7517	1.33031795
30/09/2016	3.57	30/09/2016	28.37	21.28428643		2016-10-01	49.78	64.95	30/09/2016	0.7664	1.30480167
31/10/2016	3.93	31/10/2016	29.62	22.28000071		2016-11-01	45.66	60.01	31/10/2016	0.7609	1.31423314
30/11/2016	4.02	30/11/2016	31.16	23.40571429		2016-12-01	51.97	70.37	30/11/2016	0.7385	1.35409614
31/12/2016	4	31/12/2016	31.56	23.68571357		2017-01-01	52.50	72.84	30/12/2016	0.7208	1.38734739
31/01/2017	3.8	31/01/2017	31.34	23.47142857		2017-02-01	53.47	70.49	31/01/2017	0.7585	1.31839156
28/02/2017	3.8	28/02/2017	32.08	24.00000143		2017-03-01	49.33	64.42	28/02/2017	0.7657	1.30599451
31/03/2017	3.48	31/03/2017	32.18	23.98		2017-04-01	51.06	66.93	31/03/2017	0.7629	1.31078778

Unlock all answers

Weekly leaderboard