Suppose that price and quantity are positively correlated as in this table: There is a 50% chance
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There is a 50% chance of either price. The futures price is $2.50. Demonstrate the effect of hedging if we do the following:
a. Short the expected quantity.
b. Short the minimum quantity.
c. Short the maximum quantity.
d. What is the hedge position that eliminates variability in revenue? Why?
Transcribed Image Text:
Price Quantity Revenue $2 0.6m bu $1.2m $3 0.934m bu $2.8m
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a The expected quantity is 05 06 0934 0767 million bushels We have b The minim...View the full answer
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