Question: (i) Using a mean-variance framework, compute the optimal hedge ratio using one year futures contracts if the current spot price is $28, the expected futures

(i) Using a mean-variance framework, compute the optimal hedge ratio using one year futures contracts if the current spot price is $28, the expected futures price is $18, the variances of the spot price and futures price are 9 and 8 respectively, the covariance of the spot and futures prices is 5, the level of risk aversion has a value of 2 and the risk free rate of return is 10%. 16 marks (ii) Using the information from part (i), give the value of the pure (risk minimizing) hedge ratio. [1 mark] (i) Using a mean-variance framework, compute the optimal hedge ratio using one year futures contracts if the current spot price is $28, the expected futures price is $18, the variances of the spot price and futures price are 9 and 8 respectively, the covariance of the spot and futures prices is 5, the level of risk aversion has a value of 2 and the risk free rate of return is 10%. 16 marks (ii) Using the information from part (i), give the value of the pure (risk minimizing) hedge ratio. [1 mark]

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