What is the minimum variance hedge ratio

Assignment Help Financial Management

Reference no: EM131980924

In February 2018 a U.S. grain trader who supplies corn gluten feed has growing concerns that the price of the commodity will fall before her current inventory of 10,000 tons is sold in August to be shipped overseas. However, there is no futures contract on corn gluten feed, so she decides to hedge the price risk using the September soybean meal futures. Each soybean meal futures contract is for 100 tons. At the time she puts the hedge in place, the spot price of corn gluten feed is $490 per ton. The standard deviation of the change in this price over the life of the hedge is estimated to be $7.525. The September futures price of soybean meal at that time is $336 per ton and the standard deviation of the change in this over the life of the hedge is $4.98. The coefficient of correlation between the spot price change and futures price change is 0.87.

a. What is the minimum variance hedge ratio?

b. Should the hedger take a long or short futures position?

c. What is the optimal number of futures contracts when issues associated with daily settlement were not considered?

d. What is the optimal number of futures contracts required if the daily settlement of futures contracts were taken into account?

e. Suppose that the grain trader sells her entire inventory to an overseas client on August 7 and closes out her futures position at that time. On that date, the spot price of corn gluten feed is $412 per ton, while the September futures price of soybean meal is $316 per ton. What is the effective (net) hedged price per ton which the trader will receive if the hedge from part c above were the one which was used?

Reference no: EM131980924

Questions Cloud

How would you respond to the investment : Purchased a bond that offered an YTM of 10%. How would you respond to the investment?

Calculate net cash provided or used by financing activities : Calculate the net cash provided or used by financing activities for the Brooks Corporation.

Calculates the cash flows-npv-irr-payback and mirr : Spreadsheet assignment: at instructor’s option Construct a spreadsheet that calculates the cash flows, NPV, IRR, payback, and MIRR.

Hedge and purchases the required silver in the spot market : In late July the firm closes out the hedge and purchases the required silver in the spot market.

What is the minimum variance hedge ratio : What is the minimum variance hedge ratio? What is the optimal number of futures contracts when issues associated with daily settlement were not considered?

Estimate the cash price of a bond with face value : Estimate the cash price of a bond with a face value of 100 that will mature in 30 months and pays a coupon of 4% per annum semiannually.

Futures contract in order to construct required adjustment : What position should the company take in the futures contract in order to construct the required adjustment?

Minimum variance hedge ratio implied by the data provided : What is the minimum variance hedge ratio implied by the data provided?

Long or short position in the futures contracts : Should the producer take a long or short position in the futures contracts? how many contracts are needed?

User Account

All Pages