66 0% A food processor company knows that it will buy 1 million bushels of corn

Question

66 0% A food processor company knows that it will buy 1 million bushels of corn in three months. The standard deviation of the change in the price per bushel over a 3-month period is calculated 0.050 (5.0%). The company choose to hedge by bying futures contract on corn. The standard deviation of the change in the futures price over 3-month period is 0,060(6.0%) and the coefficient between the 3-month change in the price of corn and the 3-month change in the futures price is 0.80 What is the optimal hedge ratio and if each corn contract is 42,000 bushels, how many contracts should the company entered-round it down (for example 10.7 is 10 contracts)? 0.67 16 SECTION III-PORTFOLIO PERFORMANCE (15 POINTS) Question 6 (15 points) Calculate the Ratios below given the two portfolios Average Retum Risk Free Retum Market Premu Standand Deviin Beta Renidual Standard Deviation

Explanation / Answer

Question 5 requires only hedge ratio so there is no use to find the number of contracts.

Optimal hedge ratio =(standard deviation of change in current price/standard deviation of change in future price)*correlation between them

= (0.05/0.06)*0.8

=0.67

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