Optimal Hedge Ratio

Suppose that the standard deviation of quarterly changes in the prices of a

commodity is $$0\mathrm{.}90,$ the standard deviation of quarterly changes in a futures price

on the commodity is $$1\mathrm{.}2,$ and the coefficient of correlation between the two

changes is $0\mathrm{.}8.$

If the commodity you were interested in was corn, considering that there are

actively traded futures contracts on corn available, if you were to carry out the

following analysis:

Calculate the standard deviation of quarterly changes in the price of corn

Calculate the standard deviation of quarterly changes in the corn futures

price

The correlation between the two price changes above

then you should find the hedge ratio to be approximately: