Minimum variance hedge ratio hedge

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ZZ holds 100,000 shares of stock ACDC. The stock trades for $40/share today. ZZ decides to use the Mini S&P500 index 6-months futures to hedge price fluctuations of the ACDC stock price for the next 5 months. The current 6-month futures price is 2,000 and its $m = $50. The stock's beta with this index is 1.25.

2.1 Use a time table to show how ZZ opens a minimum variance hedge ratio hedge today.

2.2 Use the same time table of 2.1 to show how ZZ will close the hedge (opened in 2.1) in 5 months when the ACDC stock price rose to $44/share and the 1-month index futures price rose to 2,050. Calculate the final value of ZZ's position.

Reference no: EM133111738

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