What is the optimal hedge ratio

Assignment Help Financial Management

Reference no: EM131336746

A food processing company knows that it will buy 1 million bushels of corn in three months. The standard deviation of the change in the price per b of bushel over a 3-month period is calculaed 0.055 (5.5%). The company chooses to hedge by buying futures contracts on corn. The sandard deviation of the change in the futures price over 3-month period is 0.065 (6.5%) and the coefficient of correlation between the 3-month change in the price of corn and 3-month change in the futures price is 0.75.

a. What is the optimal hedge ratio?

b. One Corn contract is 50,000 bushels. How many contracts should the company entered?

Reference no: EM131336746

Questions Cloud

Determine the thickness of the water layer : The horizontal force that the water applies to the runners is 5 N when the sled's speed is 15 ft/s. The total area of contact between both runners and the water is 74 cm2. Determine the thickness of the water layer under the runners.

Classic distributive bargaining scenario : The following is a classic distributive bargaining scenario, wherein each party is attempting to maximize their gains at the expense of the other. In this situation, Michelle is interested in purchasing a Toyota Highlander.

Determine the effect of given conditions : Determine the effect of each of the following conditions on the annual financing cost for a line of credit arrangement.

Describe a new technological innovation : In a three to four page paper (not including the title and reference pages), research and describe a new technological innovation not yet commercialized (e.g., house cleaning robotic). Explain how that technological innovation will change the way ..

What is the optimal hedge ratio : A food processing company knows that it will buy 1 million bushels of corn in three months. The standard deviation of the change in the price per b of bushel over a 3-month period is calculaed 0.055 (5.5%). The company chooses to hedge by buying futu..

Code the critical care evaluation and management : Due to injuries sustained in a car accident, Jane is seen by Dr. Ricker for 1hour and 15 minutes for critical care services. Code the critical care evaluation and management

Measurable over time-motivating : Select a company and summarize 2 to 3 of its long-term objectives. Explain how each long-term objective is flexible, measurable over time, motivating, suitable, and understandable.

Provide secure means of customer purchase and payment : Reduce the operating cost from 28 to 16 percent in two to three years by using an automated system for buying and selling. Provide secure means of customer purchase and payment over Internet.

Write a research about terrorism : You have a research about Terrorism.Write 8 to 10 pages about the Terrorism.it is about national security.

User Account

All Pages