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"Suppose the scenario that the standard devation of semiannual changes in the price of wheat is $0.79, the standdard devation of changes in the futures contract on wheat over the same tim eperiod is $0.93, and the correlation coeffieient relating the assest and futures contract is $0.86. What is the optimal headge ratio for the six month contract on wheat

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danialamin

Answer:

The optimal Hedge Ratio is 0.7305.

Step-by-step explanation:

Optimal Hedge ratio is given as

[tex]HR_{optimal}=\epsilon_{correlation} \times \frac{\sigma_{current}}{\sigma_{future}}[/tex]

Here

  • HR_optimal is the Hedge Ratio for the next 6 months which is to be calculated.
  • ε_correlation is the correlation coefficient relating the assets and futures contract whose value is give as $0.86.
  • σ_current is the standard deviation of the semiannual changes of the wheat which is given as $0.79
  • σ_future is the standard deviation of the  changes in the future over the same time period which is given as $0.93

So the Hedge Ratio is given as

[tex]HR_{optimal}=\epsilon_{correlation} \times \frac{\sigma_{current}}{\sigma_{future}}\\HR_{optimal}=0.86 \times \frac{0.79}{0.93}\\HR_{optimal}= \$0.7305[/tex]

So the optimal Hedge Ratio is 0.7305.

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