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How many futures contracts are necessary to this hedge

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Question - On January 15, an American farmer knows that he will have to sell 75,000 bushels of corn in June 15. In order to hedge the risk of price fluctuations, he uses September corn futures contracts. Each contract is for the delivery of 5,000 bushels. The standard deviation of monthly changes in the spot price is 1.25 and for the futures contract is equal to 1.45. The correlation between the spot and futures prices is 0.85.

Required -

a. What strategy is expected to be followed using futures and why?

b. What is the hedge ratio of this strategy and what does it mean to the asset to be hedged?

c. How many futures contracts are necessary to this hedge?

Reference no: EM132834321

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