7. Suppose today is the end of 2015 December, an investor has 1,000,000 shares of Chow Sang Sang stock. She worries that the stock price may decline in the next month, and would like to hedge her stock position with 2-month Hang Seng Index futures, or 2 month gold futures. She will liquidate her positions (sell stocks and close futures) in the end of January 2016. The excel file has the end of month prices for Hang Sang index futures, Chow Sang Sang stock and Gold futures. The attached PDF files contain the contract specifications of Hang Seng Index futures and Gold futures. Assume (1) in the end of 2015, the 1 month future's prices on Hang Seng index and gold are same as their spot prices, (2) return of futures price can be estimated by the return of spot prices, and (3) the exchange rate of HKD and USD is fixed at 7.76HKD=1USD.Please use all the data to calculate.(10 points each)

(1) In the end of 2015 December, which futures contract, Hang Sang Index or Gold, would you recommend her to hedge the 1,000,000 shares of Chow Sang Sang stock? Long or short? Why? (use return to compute)

Hint: 1.return on day t = (price day t) /(price day t-1) -1

2. compare rho: the correlation coefficients (excel function: '=CORREL')

(2) In the end of 2015 December, how many contracts does she need to trade? (use return to compute)

Hint: 1. N=h*QA /QF,QF can be found in pdf file of contract specification

2. h*=rho*Sigma(ReturnS)/Sigma(ReturnF)

2.function of standard deviation(sigma) in excel: '=STDEV'

(3) In the end of 2016 January, how much value of her wealth change relative to end of December 2015 if she hedges with Hang Seng Index Futures? (use return to compute, ignore transaction fee and commission)

Hint: Value of stock portfolio change + futures position profits