Question
1. Cross Hedging and Minimum Variance Hedge Ratio A cryptocurrency trader owns 10,000 unit of Ethereum and decides to hedge the value of the position
1. Cross Hedging and Minimum Variance Hedge Ratio
A cryptocurrency trader owns 10,000 unit of Ethereum and decides to hedge the value of the position with futures contracts on Bitcoin. One futures contract is for delivery of 5 Bitcoins. In answering the following questions, please use the statistics that you obtained in Assignment 2 Question 2 regarding Cov (S, F) and Var (F).
(a) What is the minimum variance hedge ratio?
(b) To minimize the variance of portfolio value, how many contracts does the trader need? Does the trader need to long or short?
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Fundamentals Of Financial Management
Authors: Eugene F. Brigham, Joel F. Houston
16th Edition
0357517571, 978-0357517574
