Answer-first summary for fast verification
Answer: 0.75
**154.3. B. 0.75** Since the optimal hedge ratio = correlation * spot standard deviation / futures standard deviation AND optimal number of contracts = optimal hedge ratio * quantity being hedged / quantity of contract, correlation = (optimal number of contracts * quantity of contract / quantity being hedged) * futures standard deviation / spot standard deviation. In this case, correlation = (10 * 5,000 / 100,000) * 0.90 / 0.60 = 0.75
Author: Manit Arora
Ultimate access to all questions.
Q-154.3. A wheat farmer hedged her future sale of 100,000 bushels of wheat by selling forward 10 contracts (each for 5,000 bushels; see specs here http://www.cmegroup.com/trading/agricultural/grain-and-oilseed/wheat_contract_specifications.html). The standard deviation of monthly changes in the spot and futures price of wheat is, respectively, $0.60 and $0.90. What was her correlation assumption?
A
0.67
B
0.75
C
0.80
D
0.90
No comments yet.