[Questions 20-21] An investor owns a stock. Daily change in stock price, AS, has the standard deviation of 13. To hedge risks of the stock price, the investor considers cross-hedging using one of the following futures contracts. The following table shows each futures contract's standard deviation of of futures price change, AF, and the correlation coefficient p between AS and AF. Futures contract OF p A 0.7 22 20 B 0.9 15 0.6 D 10 0.8 If the investor shorts h units of futures, the change in the portfolio value is AS hAF. 20. Which futures contract results in the smallest variance, Var (AS HAF)? (Assume that for each futures, we use respective minimum-variance hedge ratio). (a) contract A (b) contract B (c) contract C (d) contract D 21. What is the minimum variance if we use the futures contract found in question 20? (a) 5.67 (b) 32.11 (c) 60.84 (d) 86.19