Question: 1. Question 1 [Total: 20 marks] a) Consider the derivation of the optimal hedge ratio within the context of hedging. Please define the formula denoting

1. Question 1 [Total: 20 marks]

a) Consider the derivation of the optimal hedge ratio within the context of hedging. Please define the formula denoting the total variance of the component and explain the components of the equation in words.

[5 marks]

b) Express graphically the total variance defined in part a) as a function of the hedge ratio h. Please label the axes and specify on the graph the point where (optimal hedge ratio) is located. [5 marks]

c) Please explain, why a company would enter into an interest rate swap agreement.

[10 marks]

1. Question 1 [Total: 20 marks] a) Consider the derivation of the optimal hedge ratio within the context of hedging, Please define the formula denoting the total variance of the component As - haF and explain the components of the equation in words. [5 marks] b) Express graphically the total variance defined in part a) as a function of the hedge ratio h. Please label the axes and specify on the graph the point where h' (optimal hedge ratio) is located. [5 marks] c) Please explain, why a company would enter into an interest rate swap agreement. [10 marks) 1. Question 1 [Total: 20 marks] a) Consider the derivation of the optimal hedge ratio within the context of hedging, Please define the formula denoting the total variance of the component As - haF and explain the components of the equation in words. [5 marks] b) Express graphically the total variance defined in part a) as a function of the hedge ratio h. Please label the axes and specify on the graph the point where h' (optimal hedge ratio) is located. [5 marks] c) Please explain, why a company would enter into an interest rate swap agreement. [10 marks)

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