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Answer: 100 contracts
**154.1 C. Long 100 contracts** A single silver futures contract is for 5,000 ounces. Optimal hedge ratio = correlation * spot standard deviation / futures standard deviation = 0.80 * $3.20/$5.10 = 0.502 Optimal number of contracts = optimal hedge ratio * quantity being hedged / quantity of contract = 0.502 * 1,000,000 / 5,000 ~ = 100 contracts
Author: Manit Arora
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Q-154.1. The standard deviation of monthly changes in the spot price and futures price of silver is, respectively, $3.20 and $5.10. The correlation between them is 0.80. An industrial firm will need to purchase one million ounces of silver in six months but wants to hedge their price risk with silver futures (contract specifications are here http://www.cmegroup.com/trading/metals/precious/silver_contract_specifications.html). If the firm does not “tail its hedge,” how many long contracts are optimal?
A
10 contracts
B
63 contracts
C
100 contracts
D
200 contracts
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