This question aims to assess your understanding of the concept of cross hedging with futures contract and calculation of optimal hedge ratio, optimal number of contract and hedge effectiveness (Topic 2 Learning Outcomes) You are required to create an imaginary cross hedging scenario, collect appropriate data, and use the data to calculate the optimal hedge ratio, optimal number of contracts to be used and hedge effectiveness. Your answer to this question should include the following items: 1. An overview of a hypothetical cross hedging scenario for a commodity (This includes parties involved in hedging, asset to be hedged, when to hedge, length of hedge period, reason(s) to hedge, etc). Suggest and describe a futures contract for cross hedging and provide justification(s) for your choice. The justification(s) should include the calculation of correlation between the historical spot price of the asset to be hedged and historical futures price. The hedge period should fall in 2016. 2. Data collection: Collect your market data for the cross hedging problem from Global Financial Database accessible via Deakin Library. You are required to use at least 31 observations of weekly prices. Describe the data you collected (i.e., sample period, spot and futures price). The raw data must be presented in an Excel spreadsheet embedded in the Appendix section of this report. 3. Describe how you calculate the optimal hedge ratio, number of contracts to be used, and hedge effectiveness. 4. Calculate the optimal hedge ratio, optimal number of contracts to be used and hedge effectiveness. Interpret your calculation results and comment on the hedge effectiveness as part of the recommendation of selected futures contract. Wherever appropriate, the summary of your calculation and/or results should be presented in the main text of your report. However, the data, detailed calculation and detailed results should be presented in the Excel spreadsheet, which must be embedded in the Appendix section of your report. Note that 1 mark is allocated for organising and presenting the calculation/analysis and results in the embedded Excel Spreadsheet and report. 5. You must properly reference (Harvard style) all sources of information used. Important: You may refer to the cross hedging example in Chapter 3 of your textbook to help you create your own cross hedging scenario. However, your cross hedging scenario cannot be exactly the same as the one in your textbook. If you do so, a penalty will be applied