Your investment bank has an investment of $100 million in the stock of the Swiss Roll Corporation and a short position in the stock of the Frankfurter Sausage Company. Here is the recent price history of the two stocks:

Asset Spot Price Comments Magnoosium $2,800 per ton Net convenience yield

 4% per year Oat bran $.44 per bushel Net convenience yield

 .5% per month Biotech stock index 140.2 Dividend  0 Allen Wrench Co.

common stock

$58.00 Cash dividend  $2.4 per year 5-year Treasury note 108.93 8% coupon Westonian ruple 3.1 ruples  $1 12% interest rate in ruples

◗ TABLE 26.5 Spot prices for selected commodities and financial assets. See Problem 29.

Visit us at www.mhhe.com/bma Chapter 26 Managing Risk 675 Percentage Price Change Month Frankfurter Sausage Swiss Roll January 10 10 February 10 5 March 10 0 April 10 0 May 10 5 June 10 10 On the evidence of these six months, how large would your short position in Frankfurter Sausage need to be to hedge you as far as possible against movements in the price of Swiss Roll?

CHALLENGE AppendixLO1