Financial Risk Manager Part 1

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Explanation:

Use the optimal hedge ratio with tailing.

Hedge ratio: $h^* = \rho \times \frac{\sigma_S}{\sigma_F} = 0.9 \times \frac{20\%}{20\%} = 0.9$
Exposure: 1,200,000 barrels
Crude oil futures contract size: 1,000 barrels
Tailing adjustment: multiply by $\frac{S_0}{F_0} = \frac{106}{102}$

So the number of short contracts is:

N = 0.9 \times \frac{1{,}200{,}000}{1{,}000} \times \frac{106}{102} \approx 1{,}122

Therefore, the correct initial trade is short 1,122 contracts.

Explanation:

Use the optimal hedge ratio with tailing.

Hedge ratio: $h^* = \rho \times \frac{\sigma_S}{\sigma_F} = 0.9 \times \frac{20\%}{20\%} = 0.9$
Exposure: 1,200,000 barrels
Crude oil futures contract size: 1,000 barrels
Tailing adjustment: multiply by $\frac{S_0}{F_0} = \frac{106}{102}$

So the number of short contracts is:

N = 0.9 \times \frac{1{,}200{,}000}{1{,}000} \times \frac{106}{102} \approx 1{,}122

Therefore, the correct initial trade is short 1,122 contracts.

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MManit

Last updated: April 18, 2026 at 11:32

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