5. Risk of Cross-Hedging (12 points total) Your firm, HK Widgets Ltd, manufactures wid- gets. Producing 100 widgets requires 1 metric ton of refined iron. You anticipate starting production on 10,000 widgets in 3 months, requiring 100 metric tons of iron. You already have a buyer for your widgets with a fixed price, so you want to lock in the price of iron as well to reduce the risk. You decide to cross-hedge using futures on iron ore with a 4 month delivery date. (a) (3 points) Why would you not use 3 month contracts? (b) (5 points) In a few sentences, explain the basis risk involved. What are the two parts? (c) (4 points) What data would you need in order to determine the hedge ratio