What is the minimum variance hedge ratio

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A trader owns 100,000 units of a particular asset and decides to hedge the value of her position with futures contracts on another related asset. Each futures contract is on 5,000 units. The spot price of the asset that is owned is $30 and the standard deviation of the change in this price over the life of the hedge is estimated to be $0.4. The futures price of the related asset is $32 and the standard deviation of the change in this over the life of the hedge is $0.5. The correlation between the spot price change and futures price change is 0.8.

[1]. What is the minimum variance hedge ratio? __________ (*If your answer is not an integer number, round your answer at the third decimal place.)

[2]. The trader can take a ( long , short ) position in __________ futures contracts. (*Choose the correct word in the first parentheses, and fill the correct number in the second underlined place. If your answer is not an integer number, then round your answer to the nearest integer.)

Reference no: EM133109669

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