Question

1. In 6 months, Ret needs to purchase a particular commodity. Unfortunately, there are no futures contracts written on that specific commodity. However, futures contracts are available on a related commodity which mature in 6 months. The standard deviation of the spot price is $0.73 and the standard deviation of the futures price is $0.62. What is the optimal hedge ratio for Ret's exposure, assuming the correlation of the spot and futures prices is 0.91?

          1. In 6 months, Ret needs to purchase a particular commodity. Unfortunately, there are no futures contracts written on that specific commodity. However, futures contracts are available on a related commodity which mature in 6 months. The standard deviation of the spot price is $0.73 and the standard deviation of the futures price is $0.62. What is the optimal hedge ratio for Ret's exposure, assuming the correlation of the spot and futures prices is 0.91?

1. In 6 months, Ret needs to purchase a particular commodity. Unfortunately, there are no futures contracts written on that specific commodity. However, futures contracts are available on a related commodity which mature in 6 months. The standard deviation of the spot price is 0.73 and the standard deviation of the futures price is0.62. What is the optimal hedge ratio for Ret's exposure, assuming the correlation of the spot and futures prices is 0.91?

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Horngren’s Cost Accounting

Srikant M. Datar, Madhav V. Rajan 16th Edition

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Solved by Expert Bharat Koirala

Step 1

Step 1: Calculate the optimal hedge ratio using the formula: Hedge Ratio = (Standard Deviation of Spot Price / Standard Deviation of Futures Price) * Correlation Show more…

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In 6 months, Ret needs to purchase a particular commodity. Unfortunately, there are no futures contracts written on that specific commodity. However, futures contracts are available on a related commodity which mature in 6 months. The standard deviation of the spot price is $0.73 and the standard deviation of the futures price is $0.62. What is the optimal hedge ratio for Ret's exposure assuming the correlation of the spot and futures prices is 0.91?