Lee has a bakery company that will need to buy 80,000 pounds of strawberry in 3 months. Lee is worried about possible price changes, so he is considering hedging. There is no futures contract for strawberry, but there is a futures contract for orange juice. Currently the spot prices are $1.90/lb for orange juice and $5.40/lb for straw- berry. The standard deviation of the fluctuations of the prices of orange juice and strawberry is about 20% and 35%, and the correlation coefficient between them is about -0.6. (i) By the minimum-variance hedge method, how many pounds (to 2 decimal places) of orange juice Lee should hedge? Should Lee long or short the futures for orange juice? [3] (ii) By what factor, does the minimum-variance hedge reduce the risk? Give your answer in exact value. [2] (iii) What is the risk of this hedge (i.e. what is the standard deviation of the minimum- variance hedge)? Give your answer in exact value. [2]