Question
Question 3 (5 marks) A Canadian Sweet factory requires grade Sugar 16 2 months from now. The company expects it will need 20 million
Question 3 (5 marks)\ A Canadian Sweet factory requires grade Sugar 16 2 months from now. The company \ expects it will need 20 million pounds of grade Sugar 16. The standard deviation of the \ spot price change is 0.25. The company is considering a risk-minimization hedge over the \ 2 coming months using the 6-month Sugar 11 contract. The contract size is 112,000 \ pounds. The standard deviation of the futures price change is 0.35. For these particular \ grades of sugar, the correlation between the futures and spot price changes is 0.73. \ Today, the spot price of sugar 16 is $20.80 and the 6-month futures price is $22.00 per \ pound.\ (a) Compute the optimal hedge ratio and determine how many short or long contracts \ should the company trade
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