An asset manager responsible for a portfolio of agricultural commodities expects to buy

2200kg of wheat within 1 month. Historical standard deviations of wheat spot price and

wheat 1-month futures contract price are 0.06 and 0.09, respectively. Historical correlation

between the wheat spot price and the 1-month wheat futures contract price is 0.87.

Relevant characteristics of the 1-month wheat futures contract are: Contract Size: 240 kg;

Initial Margin: €4000; Maintenance margin: €3150. Under the terms of the contract, the

margin call is set to bring the margin account balance level to 8% above the initial margin.

To answer the following questions make plausible assumptions if necessary. Additionaly,

in case you prefer and when appliable, standard characters can be used (e.g. b rather

than β, capital_sigma rather than ∑ and s rather than σ).

How many contracts should the asset manager use if he wants to hedge 65% of his risk

exposure? Explain

Answer rating: 100% (QA)

To determine how many contracts the asset manager should use to hedge 65 of their risk exposure we c... View the full answer