Explanation:
Hedge ratio = correlation<sub>spot,future</sub> × σ<sub>spot</sub> / σ<sub>future</sub>
Hedge ratio = 0.65 × 0.29 / 0.22
Hedge ratio = 0.8568
(Book 3, Module 34.1, LO 34.d)
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Question 92
Sky Airlines plans to buy 15,000 barrels of oil in the future. It plans to hedge this purchase using an oil futures contract. The volatility of the spot is 0.29 and the volatility of the future is 0.22. Assuming the correlation between the spot and the future is 0.65, what is the hedge ratio that should be used?
A
0.4931.
B
0.6542.
C
0.6928.
D
0.8568.
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