Suppose That the Variance of Quarterly Changes in the Spot

question 2

Multiple Choice

Suppose that the variance of quarterly changes in the spot prices of a commodity is 0.49,the variance of quarterly changes in a futures price on the commodity is 0.81,and the coefficient of correlation between the two changes is 0.6.The optimal hedge ratio for the contract is:

• A) 0.10
• B) 0.4667
• C) 0.5444
• D) 0.9
• E) None of these answers are correct.

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Definitions:

Investment Account

An account held at a financial institution that is used to buy, hold, and sell investments such as stocks, bonds, and mutual funds.

Cost Model

An accounting method that values an asset based on the amount spent to acquire it minus any depreciation.

Dividend Income

Income earned from owning shares in a company, paid out from the company's earnings to shareholders.

Common Shares

Equity securities that represent ownership in a company, entitling shareholders to vote and typically to receive dividends.