Suppose that the variance of monthly changes in the price of commodity A is $25.

The variance of monthly changes in a futures price for a contract on commodity B (which is similar to commodity A) is $16.

The correlation between the futures price and the commodity price is 0.80.

Applying the minimum variance hedge ratio model, what hedge ratio should be used when hedging a one month exposure to the price of commodity A?

a.

0.53

b.

1.00

c.

1.25

d.

0.80