Three hundred and three diesel contracts, layered by month, against 25.2 million gallons of jet fuel: the GF561 Unit 8 hedge design memo explains that count and funds it. Searches like "gf 561 unit 8 assignment example", "gf561 unit 8 sample" and "gf561 unit 8 example" land here.
What a finished GF561 Unit 8 hedge design memo looks like
A memo of about five pages to the treasurer, with the recommendation in its first paragraph and three exhibits behind it. Consumption runs near 4.2 million gallons a month, so the six-month exposure is 25.2 million gallons, and board policy targets 60 percent of it. Thirty-six months of price changes give a jet fuel volatility of 0.186 dollars a gallon a month, a diesel futures volatility of 0.201 and a correlation of 0.91. The minimum-variance ratio is therefore 0.8421, and the hedged block of 15.12 million gallons needs 303 contracts of 42,000 gallons, layered 67, 67, 51, 50, 34 and 34 by month. Expected variance reduction on that block is about 83 percent. Initial margin is 2.12 million, and a 60-cent fall would call 7.64 million more.
How a GF561 Unit 8 example is structured
The memo runs recommendation, exposure, instrument, size, funding, alternatives and controls, each under a plain heading. The exposure section converts a flight schedule into gallons by month and states the policy share. The instrument section explains why diesel futures serve as the cross hedge: liquidity, a published contract size and historical co-movement with jet fuel. Sizing shows the ratio formula, the three inputs and their data window, then the contract count, with a line on why a one-for-one hedge would over-cover given imperfect correlation. Funding is costed in initial margin and in variation margin under two price falls. Alternatives compare the futures program with call options at 0.1504 a gallon and a collar near 0.0508. Controls close the memo: trading authority, the hedge documentation prepared at inception and a monthly effectiveness report.
Decision in the first paragraph
Contract count, layering, policy share and the liquidity reserve appear before any analysis, so the treasurer can read one paragraph and know what is being asked.
Why diesel stands in for jet
Jet fuel futures trade too thinly for a program this size, so the memo defends the diesel contract on liquidity and a 0.91 correlation measured over thirty-six months.
A ratio below one
Correlation times the ratio of volatilities gives 0.8421, and the memo explains why hedging gallon for gallon would add basis risk rather than remove it.
Layered by forecast certainty
Nearer months, where the schedule is firm, take 80 percent policy cover and the last two take 40, which keeps the program inside forecast error.
Cash before the savings
Initial margin of 2.12 million and a variation call of 7.64 million after a 60-cent fall are funded from a stated reserve rather than assumed away.
Options priced, not dismissed
Calls struck at 2.60 would cost about 1.91 million for the same gallons, and the memo reserves them for tenors where volume is least certain.
Where marks go in GF561 Unit 8
Hedge memos lose most when the hedge ratio is assumed to be one, since a cross hedge on an imperfectly correlated contract then over-covers and adds its own risk. A ratio computed from price levels rather than price changes is the next most common error, and it usually inflates the correlation. Memos that stop at a contract count and never price the funding miss what a treasurer most needs, the cash a falling market would demand while fuel savings arrive only as it is burned. Alternatives mentioned without costs read as lists rather than comparisons. Graders also expect the policy share and the layering to be justified by forecast certainty, and the memo to name who holds trading authority and how effectiveness will be reported.
Get a GF561 Unit 8 example written to your instructions
Send the firm, the exposure and the instruments your GF561 Unit 8 prompt describes, together with any price data and the rubric, and the memo gets sized from those numbers with its funding costed. A composite airline fills in where no firm is named. The opening custom sample costs nothing and generally takes 24-48h.
GF561 Unit 8 questions, answered
How do I calculate the minimum-variance hedge ratio?
Multiply the correlation between changes in the spot and futures prices by the ratio of their standard deviations. The sample uses thirty-six months of changes, not levels, and shows all three inputs with their data window. The resulting 0.8421 is then applied to the hedged gallons and divided by the contract size to reach the number of contracts.
Why not hedge the full exposure?
Because consumption forecasts are uncertain, and a hedge larger than the fuel eventually burned becomes a speculative position. The sample follows a board policy of 60 percent over six months, heavier in the near months where schedules are firm. Your prompt may state a different policy share, and the custom memo sizes to that figure instead.
Does the memo need to discuss hedge accounting?
Briefly, when the prompt mentions reporting. The sample notes that hedge accounting typically requires documentation prepared at inception, naming the hedged item, the instrument and how effectiveness will be assessed. It does not attempt a full accounting treatment, which belongs to a different course, but it shows the treasurer what must be in place before the first trade.