3. An investor owns a stock. Daily change in stock price, AS, has the standard deviation...
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3. An investor owns a stock. Daily change in stock price, AS, has the standard deviation of 10. To hedge risks of the stock price, the investor considers cross-hedging using one of the following futures contracts. The following table shows each futures contract's standard deviation of of futures price change, AF, and the correlation coefficient p between AS and AF. Futures contract OF P 20 0.7 18 0.9 13 0.6 8 0.8 A B с D If the investor shorts h units of futures, the change in the portfolio value is AS - hAF. (a) Which futures contract results in the smallest variance, Var (AS – hAF)? Assume that for each futures, we use respective minimum-variance hedge ratio. (3 points) (b) What is the minimum variance if we use the futures contract found in (a)? (2 points) 3. An investor owns a stock. Daily change in stock price, AS, has the standard deviation of 10. To hedge risks of the stock price, the investor considers cross-hedging using one of the following futures contracts. The following table shows each futures contract's standard deviation of of futures price change, AF, and the correlation coefficient p between AS and AF. Futures contract OF P 20 0.7 18 0.9 13 0.6 8 0.8 A B с D If the investor shorts h units of futures, the change in the portfolio value is AS - hAF. (a) Which futures contract results in the smallest variance, Var (AS – hAF)? Assume that for each futures, we use respective minimum-variance hedge ratio. (3 points) (b) What is the minimum variance if we use the futures contract found in (a)? (2 points)
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Related Book For
Financial Institutions Management A Risk Management Approach
ISBN: 978-0071051590
8th edition
Authors: Marcia Cornett, Patricia McGraw, Anthony Saunders
Posted Date:
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