Financial Ratios
A Ratio refers to a figure calculated as a reference to the relationship of two or more numbers and can be expressed as a fraction, proportion, percentage, or the number of times. When the number is determined by taking two accounting numbers derived from the financial statements, it is termed as the accounting ratio.
Return on Equity
The Return on Equity (RoE) is a measure of the profitability of a business concerning the funds by its stockholders/shareholders. ROE is a metric used generally to determine how well the company utilizes its funds provided by the equity shareholders.
A farmer is currently growing wheat and plans to sell it in September next year. He needs to plan his budget now, because of upcoming expenses. Suppose that the futures price of wheat for September delivery is £100 per ton. There is 50% probability that the spot price of wheat in September will be £90 per ton or £110 per ton.
Suppose that the farmer is not certain about the quantity of wheat he will sell in September. For each possible price of wheat, there are two equally likely quantities, i.e., there are four equally likely price-quantity pairs, which are shown in the Table that is attached as an image below.
Based on the above information and table attached in the images, please design a hedging strategy that minimizes the variance of the farmer’s revenue in September.
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