70.2K

Verified Solution

Link Copied!

Please help with these questions. I will leave a thumbs up for any help. Thankyou. Class: Finance Derivatives

A company needs to purchase commodity A in one month. Suppose that the standard deviation of monthly changes in the price of commodity A is $0.2. The standard deviation of monthly changes in the futures price for a contract on commodity B is $0.3. The correlation between the futures price and the commodity A's spot price is 0.9 (notice the negative sign). (a) (10pts) What hedge ratio should be used when hedging a one-month exposure to the price of commodity A? Should the company long or short the futures contract on commodity B. (b) (10 pts) Suppose the position to be hedged consists of 1 million units of commodity A, and each futures contract represents 42,000 units of commodity B. How many futures contracts should be used for hedging? (c) (10pts) After hedging using the futures, by what percentage is the variance of the underlying exposure reduced? 20 points A fund manager has just shorted a portfolio worth of $50 million with a beta of 0.8. The manager would like to achieve a market-neutral position by trading on 3 -month futures contracts on the S\&P 500. The current 3-month futures price is 2280 . One contract consists of 250 times the index. (a) (10 pts) What position (ie. the number of contracts) should the fund manager take to eliminate all exposure to the market over the next 2 months? Should he long or short futures? (b) (10 pts) Calculate the effect of your strategy on the fund manager's returns if the futures prices of S\&P 500 increases to 2350 and the value of the portfolio he shorted becomes $51 million

Answer & Explanation Solved by verified expert

See Answer