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105

5.Suppose that the standard deviation of monthly changes in the price of commodity A is $2. The standard deviation of monthly changes in a futures price for a contract on commodity B (which is similar to commodity A) is $3. The correlation between the futures price and the commodity price is 0.9. What hedge ratio should be used when hedging a one month exposure to the price of commodity A?

A. 0.60

B. 0.67

C. 1.45

D.0.90

A. 0.60

B. 0.67

C. 1.45

D.0.90

Answer: A

The optimal hedge ratio is 0.9×(2/3) or 0.6.

The optimal hedge ratio is 0.9×(2/3) or 0.6.

Flashcard info:

Author: CoboCards-User

Main topic: Finance & Investment

Topic: Derivatives

Published: 27.10.2015