Question
A canola farmer wants to hedge her risk associated with next years harvest, at which time she expects to harvest 200 tonnes of canola and
A canola farmer wants to hedge her risk associated with next years harvest, at which time she expects to harvest 200 tonnes of canola and sell it six months from now. The current spot price of canola is $499.50 per tonne and the 6-month forward price is 498.00 per tonne. The return volatility of canola is 20% per year and the risk-free rate is 4% per year (EAR). She assumes that the volatility of her harvest is 50 tonnes and the correlation between quantity harvested and canola price is 0.4, the canola price is uncorrelated with the market portfolio, and the risk-free rate is constant. How should she best hedge her risk using 6-month forward contracts?
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