Tailing the Hedge

[notjusttp]

Hi David,

In your solution to Hull 3.16b where to tail the hedges you have replaced size with values , i am not clear where you are getting the following values to multiply with the Purchases

0.7* 200000 - To arrive at Size of Position ( where does 0.7 come from?)
$1 * 40000 - To arrive at value of 1 Future contract ( where does 1 come from?)

If you refer Tailing the hedge discussion in Hull ( Page 58 chapter 3) Value of position is 2,000,000 * Spot rate( 1.94) and futures value is 42000* Futures price.

So Hull uses the Spot and futures rate and you seem to have used correlation coefficient (0.7)

Kindly clarify on this

Thanks & best Rgds
Amit :roll:

 

[notjusttp]

Hi David,

Can you pls chk on this as this is a testable concept....Thks & rgds..Amit

 

[David Harper CFA FRM]

Hi Amit,

I am baffled by my answer ??!! Oops, sorry, what a mess: the question does not even supply prices ... of course your are correct. Consider this a DEFECT with my apologies (deleted in forum, will not for the hard PDF)...thanks! David

 

[notjusttp]

Hi David,

Thank God you were wrong here.. I was really baffled myself for having studied this concept from all angle when i saw your question i lost my confidence..thanks goodness now my confidence is intact..cheers...Amit