Question: Price changes on two gold-mining stocks have shown strong positive correlation. Their historical relationship is Changes in B explain 60 percent of the variation of

Price changes on two gold-mining stocks have shown strong positive correlation. Their historical relationship is Changes in B explain 60 percent of the variation of the changes A

a. Suppose you own $100,000 of A. How much of B should you sell to minimize the risk of your net position?

b. What is the hedge ratio?

c. Here is the historical relationship between stock A and gold prices: If can you lower the risk of your net position by hedging with gold (or gold futures) rather than with stock B? Explain.

Percentage Price Change Frankfurter Sausag Swiss Roll Month -10 January February March April May June -10 -10 -10 +10 +10 +10 0 0 +5 +10

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