Question
2 a- Estimate and interpret the minimum variance hedge ratio for each of the future commodity. Use the OLS method and comment on the significance
2 a- Estimate and interpret the minimum variance hedge ratio for each of the future commodity. Use the OLS method and comment on the significance of the results.
For the HO1 Commodity, the minimum variance hedge ratio is; h*=0.875547.57476/20527 h*=1.06876
For the CO1 Commodity, the minimum variance hedge ratio is; h*=0.775667.57472/3205 h*=2.53195
2 b- Discuss whether differences in the hedge ratio between the two commodities will have any effect on the effectiveness of the hedge.
2 c- Recommend a convenient hedging strategy to the CFO using the data provided and explain the corresponding hedging position.
2 d- What are the potential factors that may weaken your suggested strategy. Discuss
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