Question
A national restaurant chain needs to buy 25,500 bushels of onions in 3 months (a bushel is 57 pounds). Since futures on onions are illegal
A national restaurant chain needs to buy 25,500 bushels of onions in 3 months (a bushel is 57 pounds). Since futures on onions are illegal in the U.S. (don't ask), it has decided to use futures contracts on corn to hedge its position. Each corn futures contract covers 5,000 bushels.
The spot price of onions is $40.77 per bushel, while the corn futures price for delivery in 3 months is $3.35 per bushel.
The standard deviation of quarterly changes in the onion price is $1.3, the standard deviation of quarterly changes in the corn futures price is $2.85, and the coefficient of correlation between the two changes is 0.4.
How many futures contracts should the company trade to minimize the risk (rounded to the nearest integer)?
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