David on page number 12 of book 2 you have mentioned a scenario wherein the jet fuel price increases by $1/gallon.

I have got the answer till the computation of number of contracts 16.25 but I can’t understand after that. How did you get Futures price gain $1.51 and proceeded further? Please explain.

anupamjain008,

Here is link to the XLS.

I divided the +1$ spot change by r^2: correlation is (r) but coefficient of determination (r^2) gives the change in future price “explained by” change in spot.

Do you mind me asking, how did you get a copy of PDF?

Thanks,
David

It is still not clear to me how the change in future price ["Futures Price Gain” = E29] can be computed the change in spot price of jet fuel [E28 = $1] divided by r^2.

I thought r^2 was a measure of the “goodness of fit” (r =1 means a perfect linear fit; r = 0 means uncorrelated or totally random scatter plot; r = -1 means perfect negative linear correlation).  Q: What do you mean by “explained by?”

Using linear regression don’t we need to calculate the slope ("beta") between the deltaF and deltaS [=SLOPE(D5:D16, E5:E16)]?

Also this is my first time on this forum.  What is does “Fast Reply” and “Post Reply” mean?

Ooops, typos. It is still not clear to me how the change in futures price ["Futures Price Gain” = E29] can be computed by the change in spot price of jet fuel [E28 = $1] divided by r^2.

I thought r^2 was a measure of the “goodness of fit” (r =1 means a perfect linear fit; r = 0 means uncorrelated or a totally random scatter plot; r = -1 means perfect negative linear correlation).  Q: What do you mean by “explained by?”

Using linear regression don’t we need to calculate the slope ("beta") between the deltaF and deltaS [=SLOPE(D5:D16, E5:E16)]?

Also this is my first time on this forum.  What is does “Fast Reply” and “Post Reply” mean?

Geez...i thought it was a nice trick but now i think it was a total brain fart. I agree with you completely. I don’t really know what I was thinking!? Thank you for pointing this out...I will correct the XLS…

Fast Reply: frankly, i am not sure, it came with the forum module.

Thanks for your first post, value add! David

@anupamjain008: You were right to question, as Mickey has pointed out. Apologies.

anupamjain008 & Mikey,

Please note I (finally) correct the bottom of the minimum variance hedge XLS to “test” for the hedge using the beta (slope) as you correctly point out should be used.

XLS @ http://www.bionicturtle.com/premium/editgrid/2008_frm_hull_derivatives_minimum_variance_hedge/

David