Suppose that you have to sell an asset (in pound unit) in 3 months from today. This asset does not have futures contract on it. Hence, you need to cross hedge using futures contract on other assets. Here are two candidate futures contract F and G. The table below shows historical price data of the asset to by hedged (U) and prices of F and G. Currently, you hold 500,000 pound of the asset. The size of one futures contract both for F and G is 200.

monthUtFtGt1

$5$5.5

$6.22$7$7.7$6.23$6$6.1$4.54$4$4.9$6.05$5$4.6$7.56$3$3.5$1.37$4$4.8$3.9

1. Fill in the following table and report.

monthUt

Ft

Gt

22fill infill in3fill infill in4fill infill in1.55fill infill infill in6fill in-1.1fill in71fill infill in

2. Find out the optimal hedge ratios using F and G, respectively.(Notice that there are two optimal hedge ratios between (Ut and Ft) and between (Ut and Gt)

3. Find out the measures of hedge effectiveness using F and G, respectively. (Notice that there are two values of hedge effectiveness between (Ut and Ft) and between(Ut and Gt)

4 .Find out the optimal number of contracts using F and G, respectively.(Two values of optimal number of contracts)

5. Which futures between F and G has to be used for cross hedge? Why?

Notice: Use the sample measures of standard deviations.

You have to use the change values (Ut, Ft, Gt) to determine the optimal hedge ratio and others