You are the CFO of Graens Inc., a grain wholesaler. Following the harvest season, you have a large pile of 200 tonnes of wheat sitting in your storage. You are a bit worried about the price volatility for wheat over the next 6 months (the standard deviation is estimated at $20 per month), so you are looking to set up a hedge to reduce the price risk of the wheat stock. Unfortunately, no wheat futures are available to trade to provide a perfect hedge. Your contact at the local branch of Silverboy Ltd investment bank suggests you take a position in barley or corn futures with a maturity of 8 months instead. The betas of those barley and corn futures with respect to wheat spot prices are 1.2 and 0.9, respectively. The standard deviation of barley and corn futures prices is $12 and $18 per month, respectively. The current spot price for wheat is $80/tonne, while the current futures prices for barley and corn are $60/tonne and $50/tonne, respectively. The size of a futures contract is 10 tonnes of barley/corn. Based on this information, what is the variance-minimizing hedge position? What is the reduction in price variance that you can achieve with that hedge?

The forward price for GME stock for delivery in 9 months from now is $79.88. The risk-free interest rate is 8% per annum with continuous compounding. What is the spot price of GME stock?

Answer rating: 100% (QA)

To determine the varianceminimizing hedge position youll want to calculate the hedge ratio using ... View the full answer