Suppose that the standard deviation of quarterly changes in the prices of a commodity is $0.65, the standard deviation of quarterly changes in a futures price on the commodity is $0.81, and the coefficient of correlation between the two changes is 0.8. A three-month contract is used for hedging. Which of the following is true?
A. The size of the futures position should be 64.2% of the size of the company’s exposure in a three-month hedge.
B. The size of the company’s exposure should be 64.2% of the size of the futures position in a three-month hedge.
C. The size of the futures position should be 35.8% of the size of the company’s exposure in a three-month hedge.
D. The size of the futures position should be 99.7% of the size of the company’s exposure in a three-month hedge.
Answers: 3
= 0.8×0.80 = 0.6419
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Suppose that the standard deviation of quarterly changes in the prices of a commodity is $0.65, the...
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