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Following question is on hedging: A canola farmer wants to hedge her risk associated with next year's harvest, when she expects to harvest 200 tons
Following question is on hedging:
A canola farmer wants to hedge her risk associated with next year's harvest, when she expects to harvest 200 tons of canola and sell it 6 months from now. The current spot price of canola is S250 per ton and the convenience yield for canola is -10% per year and the return volatility of canola is 20% per year. The risk-free rate is 4% per year. She assumes that the volatility of her harvest is 50 tones and the correlation between quantity harvested and price is -0.5. How should she hedge her risk using 6-month futures contractsStep by Step Solution
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