The Correlation Between Changes in Price of a Spot Asset

question 16

Multiple Choice

The correlation between changes in price of a spot asset and futures asset is 99%.The standard deviation of changes in spot prices is $2,and that of futures prices is $3.What is the standard deviation of a position that is long 5 units of the spot asset and is optimally (i.e. ,minimum-variance) hedged by using futures?

• A)1.41
• B)1.99
• C)2.52
• D)3.11

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