Hi, regarding this question:
4. A wheat farmer hedged her future sale of 100,000 bushels of wheat by selling forward 10
contracts (each for 5,000 bushels). 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
The answer is:
The optimal hedge ratio = correlation * spot standard deviation / futures standard deviation.
The optimal # of contracts = optimal hedge ratio * quantity being hedged / quantity of
contract.
Correlation = (optimal # 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
Should it not be: spot standard deviation/ futures standard deviation?? 0.6/0.9??
4. A wheat farmer hedged her future sale of 100,000 bushels of wheat by selling forward 10
contracts (each for 5,000 bushels). 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
The answer is:
The optimal hedge ratio = correlation * spot standard deviation / futures standard deviation.
The optimal # of contracts = optimal hedge ratio * quantity being hedged / quantity of
contract.
Correlation = (optimal # 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
Should it not be: spot standard deviation/ futures standard deviation?? 0.6/0.9??