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In October, you own 20,000 shares of America House of Jazz. The spot price is...

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Finance

In October, you own 20,000 shares of America House of Jazz. The spot price is $90 per share. You plan to sell the shares in November to pay for a house you have just bought. You are concerned that share prices will FALL substantially by November. There is a December futures contract on 100 shares of America House of Jazz. The futures price is $92 per share. You estimate the following regression for the hedging period: Changes in the share price = 0.95 Changes in the futures price.

A) Design an optimal hedging strategy. B) Assume that by November the spot price rose by $4.75 to $94.75 per share, and the futures price changed as estimated by the regression. What is the total gain/loss on the spot position?What is the total gain/loss on the futures position? How much money did you get from selling the shares and closing the hedge? C) Assume that by November the spot price fell by $9.50 to $81.50 per share, and the futures price changed as estimated by the regression. What is the total gain/loss from the spot position?What is the total gain/loss from the futures position? How much money do you get from selling the shares and closing the hedge?

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