Your investment bank has an investment of $100 million in the stock of the Swiss Roll Corporation and a short position in the stock of the Frankfurter Sausage Company. Here is the recent price history of the two stocks: Percentage price change:

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter14: Capital Structure Management In Practice
Section: Chapter Questions
Problem 15P
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Your investment bank has an investment of $100 million in the stock of the Swiss Roll Corporation and a short position in the stock of the Frankfurter Sausage Company. Here is the recent price history of the two stocks:

Percentage price change:

Month

Frankfurter Sausage  

Swiss Roll

January

-10%

-10%

February

-10%

-5%

March

-10%

0%

April

10%

0%

May

10%

5%

June

10%

10%

 

  • Using the evidence from these six months, how large would your short position in Frankfurter Sausage need to be to hedge as far as possible against movements in the price of Swiss Roll? Please explain to detail on your excel spreadsheet. Thank you
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