Question
The standard deviation of quarterly changes in the price of a commodity is $0.60, the standard deviation of quarterly changes in the futures price of
The standard deviation of quarterly changes in the price of a commodity is $0.60, the standard deviation of quarterly changes in the futures price of the commodity is $0.50, and the coefficient of correlation between the two changes is 0.75. A company plans to sell 10,000 units of the commodity in 3 months, the size of the futures contract is on 100 units of the commodity and the delivery date of the contract is in 6 months. Consider the following statements.
I The company can optimally hedge by selling 90 futures contracts.
II The proportion of risk that can be eliminated by hedging optimally is 75%. Which of the following is correct?
a. Statement I is incorrect, Statement II is incorrect.
b. Statement I is correct, Statement II is correct.
c. Statement I is correct, Statement II is incorrect.
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