Part C: Hedging an underlying asset using futures Sharon is a potato farmer who wants to sell her potatoes in 20 days. She is concerned about adverse price changes over the next 20 days and wishes to hedge Sharon decides to cross hedge her position worth $3,800,000 TODAY using futures on wheat - the correlation between potatoes and wheat is 0.94. Using the following information, construct a hedge for Sharon: Min Variance Hedge Ratio Number of Contracts Correlation Std. Dev Potato Std. Dev Wheat Value of One Futures Unit 0.943399174 0.028522657 0.027176527 $50 Remember, the purpose of hedging isn't to make a profit but to protect yourself from any adverse price movements - you're sacrificing potential upside gain to protect downside loss *Hint: You need to work out the optimal hedge ratio and number of contracts first (you cannot buy partial contracts) - you should round to the closest whole number of contracts. Hedged Position Value ($) 1. Too Date 2/10/21 3/10/21 4/10/21 102 5/10/21 6/10/21 02 7/10/21 8/10/21 9/10/21 10/10/21 11/10/21 12/10/21 13/10/21 14/10/21 15/10/21 16/10/21 16 17/10/21 101 18/10/21 19/10/21 20/10/21 21/10/21 22/10/21 Closing Spot Price Potato (per ton) Potato Position Value ($) Closing Future Price Wheat Cumulative Futures P/L ($) $595.94 807.614 $594.25 805.4756488 $581.28 784. 1738673 $592.92 793.75 tot $584.64 2007.09 773. 1671316 $572.53 744.9645469 P312.02 100400 $604.41 796.7272162 200.91 $593.12 786.7744232 POD. 12 100.16412041 P13.30 $573.38 710.2010 770.294961 $559.55 755.9064298 10 00.2001 $548.62 741.9367478 2010.64 +1.936/478 $555.41 749.6242757 $551.84 745.4572717! $546.18 738.604774 $543.79 735,4223757 our $531.77 7122555494 - $506.23 693.2521881 4 $499.11 687.0400899 w $493.91 681.2011335) $513.79 702.5871769 $545.11 736.5585735 Part C: Hedging an underlying asset using futures Sharon is a potato farmer who wants to sell her potatoes in 20 days. She is concerned about adverse price changes over the next 20 days and wishes to hedge Sharon decides to cross hedge her position worth $3,800,000 TODAY using futures on wheat - the correlation between potatoes and wheat is 0.94. Using the following information, construct a hedge for Sharon: Min Variance Hedge Ratio Number of Contracts Correlation Std. Dev Potato Std. Dev Wheat Value of One Futures Unit 0.943399174 0.028522657 0.027176527 $50 Remember, the purpose of hedging isn't to make a profit but to protect yourself from any adverse price movements - you're sacrificing potential upside gain to protect downside loss *Hint: You need to work out the optimal hedge ratio and number of contracts first (you cannot buy partial contracts) - you should round to the closest whole number of contracts. Hedged Position Value ($) 1. Too Date 2/10/21 3/10/21 4/10/21 102 5/10/21 6/10/21 02 7/10/21 8/10/21 9/10/21 10/10/21 11/10/21 12/10/21 13/10/21 14/10/21 15/10/21 16/10/21 16 17/10/21 101 18/10/21 19/10/21 20/10/21 21/10/21 22/10/21 Closing Spot Price Potato (per ton) Potato Position Value ($) Closing Future Price Wheat Cumulative Futures P/L ($) $595.94 807.614 $594.25 805.4756488 $581.28 784. 1738673 $592.92 793.75 tot $584.64 2007.09 773. 1671316 $572.53 744.9645469 P312.02 100400 $604.41 796.7272162 200.91 $593.12 786.7744232 POD. 12 100.16412041 P13.30 $573.38 710.2010 770.294961 $559.55 755.9064298 10 00.2001 $548.62 741.9367478 2010.64 +1.936/478 $555.41 749.6242757 $551.84 745.4572717! $546.18 738.604774 $543.79 735,4223757 our $531.77 7122555494 - $506.23 693.2521881 4 $499.11 687.0400899 w $493.91 681.2011335) $513.79 702.5871769 $545.11 736.5585735
