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Hoyas Dog Food produces 250,000 pounds of dog food a year. For every pound of dog food, 0.7 pounds of cattle meat are used. The σdf = 0.17, σc = 0.42 and the correlation coefficient between the two prices is 0.69. To minimize its risk Hoyas has decided to enter into cattle contracts. How many cattle contracts should Hoyas enter into to have a minimize-variance hedge if each contract is for 40,000 pounds of cattle?
A. Long 2 contracts
B. Long 3 contracts
C. Long 6 contracts
D. Short 6 contracts
E. Enter into zero contracts
PLEASE SHOW ALL FORMULA & WORK & EXPLANATIONS -----All rates are per annum with continuous compounding unless otherwise stated.
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