Suppose the standard deviation of monthly changes in the price of a commodity is 0.4. The standard deviation of monthly changes in futures price for a contract on commodity B (similar to commodity A) is 0.5. The correlation between the futures and commodity price is 0.88. What is the hedge ratio and the optimal number of contracts if the commodity trader wants to hedge 10000 bushels and one contract is on 100bushels? Hedge ratio should be rounded off to three decimal places and optima number of contracts should be in whole numbers.
Macrohedging
Hedging or hedge accounting is a risk-mitigation technique used to protect the current financial position from potential losses. Hedging is often confused with speculating. The major difference between the two is that hedging does not involve guessing, whereas speculation is based on guessing the direction of movement of the underlying asset to book profits.
Finance Mathematics
The area of applied mathematics known as mathematical finance, also known as quantitative finance or financial mathematics is concerned with the mathematical modeling of financial markets. The application of mathematical methods to financial problems is known as financial mathematics. A financial market is a place where people can exchange low-cost financial securities and derivatives. Stocks and bonds, raw materials, and precious metals, both of which are regarded as commodities in the stock markets, are examples of securities. It uses probability, statistics, stochastic processes, and economic theory as methods.
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
