Berkshire Hathaway Inc. (NYSE: BRK.A) would like to hedge its $10 million exotic insurance portfolio by using
Question:
Berkshire Hathaway Inc. (NYSE: BRK.A) would like to hedge its $10 million exotic insurance portfolio by using S&P 500 futures. Having heard about your excellent grades in the Derivatives class, Berkshire chairman Warren E. Buffett has hired you as a consultant to help construct this hedging trade. Mr. Buffett believes that the correlation between the returns of his insurance portfolio and that of index futures is -0.8. He also provides you that the standard deviation of the returns of the insurance portfolio and index futures is 15% and 6% respectively.
Assuming that one contract of index futures has a value of $180,000 today, how many contracts should Mr. Buffett buy or sell for the best hedge?
Introduction to Management Accounting
ISBN: 978-0133058789
16th edition
Authors: Charles Horngren, Gary Sundem, Jeff Schatzberg, Dave Burgsta