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FINS 3635 Computer Assignment

For this assignment, you must submit your answers individually; this is not a group assignment.
The due date for the assignment is Friday, 24 March, 2017 by midnight, through Assignment on
Moodle. For this assignment you should only have to submit your final spreadsheet. If you feel you
need to make additional comments, you may also submit a Word document, but it shouldnt be

The purpose of this assignment is to have you calculate an Optimal Hedge Ratio using real data. See
Ch. 3, slides 34 to 44. I even include a calculation from an ASIDE (slide 3-42) as youll see.

The Data: The spreadsheet, Oil Futures Data.xls, contains spot prices, S (column B) and futures prices,
F (column C) for a period from 6/03/2015 to 7/03/2017.

(a) In column D calculate the daily changes in the spot prices, S, i.e., St St 1. Then, in column E
do the same thing for futures prices, F.
( St St 1 )
(b) In column F calculate daily returns for S: . In column G do the same thing for futures
St 1
prices, F.
(c) In cell H2 calculate the standard deviation of changes in S. Use =stdev(). Then in cell I2 do
the same thing for F.
(d) In cell J2 calculate the correlation between changes in S and changes in F. Use =correl().
(e) In cell K2 use the formula in the lecture notes to calculate the optimal hedge ratio, h*. Use the
formula that uses the above values.
(f) In cell L2 use the regression interpretation of h* (starting on slide 3-42 of the notes) to
calculate the appropriate slope. Use the Excel command =slope(). You should be able to
use the Excel prompts to figure out how to use the slope command, and read the notes to see
which variable is x and which is y in the regression. Which column represents the y variable?
(g) Does your answer in cell L2 agree with your answer in cell K2? (No marks for this question,
but please think about the question, and comment on the spreadsheet if you like.)
(h) In cell M2, calculate the standard deviation of daily returns in S; and then use cell N2 to find
standard deviation of daily returns in F.
(i) Use the equation on slide 3-42 (in the Aside) to calculate h* using the standard deviation of
returns. For S and F use the most recent values as given in the spreadsheet. (What are the
most recent values of S and F?) Enter your answer in cell O2.
(j) Are your calculations of h* reasonably close? (No marks for this question, just see whether
you think the results are close.)
(k) Suppose your firm wants to hedge the purchase of 500,000 barrels of oil in three months.
Using your estimate of h* from part (e) above, how many contracts should you buy/sell in
order to hedge this future purchase? Enter your answer in cell P2.