A trader owns 55,000 units of a particular asset and decides to hedge the value of her position with futures contract on another related asset. Each futures contract is on 5,000 units. The spot price of the asset that is owned is $28 and the standard deviation of the percentage one-day change in the price over the life of the hedge is estimated to be $0.43. The futures price of the related asset is $27 and the standard deviation of the percentage one- day change in this over the life of the hedge is $0.40. The coefficient of correlation between the spot price percentage one-day change and futures price percentage one-day change is 0.95. (1) What is the minimum variance hedge ratio? (2) Should the hedge take a long or short futures position?(3) What is the optimal number of futures contracts?

A trader owns 55,000 units of a particular asset and decides to hedge the value of her position with futures contract on another related asset. Each futures contract is on 5,000 units. The spot price of the asset that is owned is $28 and the standard deviation of the percentage one-day change in the price over the life of the hedge is estimated to be $0.43. The futures price of the related asset is $27 and the standard deviation of the percentage one- day change in this over the life of the hedge is $0.40. The coefficient of correlation between the spot price percentage one-day change and futures price percentage one-day change is 0.95. (1) What is the minimum variance hedge ratio? (2) Should the hedge take a long or short futures position?(3) What is the optimal number of futures contracts?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter6: Fixed-income Securities: Characteristics And Valuation

Section: Chapter Questions

Problem 9P

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