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What is the optimal hedge ratio

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Reference no: EM13342441

Q1. Under what circumstances are (a) a short hedge and (b) a long hedge appropriate?

Q2. Explain what is meant by a perfect hedge. Does a perfect hedge always lead to a better outcome than an imperfect hedge? Explain your answer.

Q3. Suppose that the standard deviation of quarterly changes in the prices of a commodity is $0.65, the standard deviation of quarterly changes in a futures price on the commodity is $0.81, and the coefficient of correlation between the two changes is 0.8. What is the optimal hedge ratio for a 3-month contract? What does it mean?

Q4. A corporate treasurer is designing a hedging program involving foreign currency options. What are the pros and cons of using (a) NASDAQ OMX and (b) the over-the-counter market for trading?

Q5. Explain why an American option is always worth at least as much as a European option on the same asset with the same strike price and exercise date.

Q6. Explain why an American option is always worth at least as much as its intrinsic value. Explain carefully the difference between writing a put option and buying a call option.

Reference no: EM13342441

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