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All main topics / Finance & Investment / Derivatives / Derivatives
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
Answer: A

The optimal hedge ratio is 0.9×(2/3) or 0.6.
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Flashcard info:
Author: CoboCards-User
Main topic: Finance & Investment
Topic: Derivatives
Published: 27.10.2015




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