You have been working as a futures trader at Deutsche Bank, New York. You have collected the following information on Lean Hog. The standard deviation of monthly changes in the spot price of Lean Hog Futures is (in cents per pound) 6. The standard deviation of monthly changes in the futures price of Lean Hog Futures the closest contract is 8. The correlation between the futures price changes and the spot price changes is 0.8. It is now December 17, 2019. Your client, a pig farmer, is committed to selling 800,000 pounds of lean hog on January 15. Your client wants to use February Lean Hog futures contracts to hedge its risk. Each contract is for the delivery of 80,000 pounds of cattle. a. What is the optimal hedge ratio?[x] (sample answer: 0.75) b. Should the pork producer take a long or short hedge?[y](sample answer:Long; or Short) c. How many contracts of lean hog futures does your client need to take to hedge the risk? [z] (sample answer: 7 Contracts)
Answer & Explanation
Solved by verified expert
Get Answers to Unlimited Questions
Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!
Membership Benefits:
Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
