Answer: 82 contracts

When tailing the hedge, the number of contracts is based on the value of the exposure relative to the futures contract value: \[ N^* = h^* \times \frac{Q_A S_0}{Q_F F_0} \] Using: - \(h^* = 0.80 \times \frac{3.20}{5.10} \approx 0.502\) - \(Q_A = 1{,}000{,}000\) - \(S_0 = 40\) - \(Q_F = 5{,}000\) - \(F_0 = 49\) \[ N^* = 0.502 \times \frac{1{,}000{,}000 \times 40}{5{,}000 \times 49} \approx 0.502 \times 163.27 \approx 81.9 \] Rounded to the nearest whole contract, this is **82 long contracts**. **Correct answer: B) 82 contracts**.

Author: Manit Arora