An investor owns a stock. Daily change in stock price, S, has the standard deviation of 13. To hedge risks of the stock price, the investor considers cross-hedging using one of the following futures contracts. The following table shows each futures contracts standard deviation F of futures price change, F, and the correlation coefficient between S and F. Futures contract F A 22 0.7 B 20 0.9 C 15 0.6 D 10 0.8

If the investor shorts h units of futures, the change in the portfolio value is S hF.

(a) Which futures contract results in the smallest variance, Var (S hF)? (Assume that for each futures, we use respective minimum-variance hedge ratio). (b) What is the minimum variance if we use the futures contract found in question 20?