You are a portfolio manager of an all-stock portfolio of $100 million, and you would like to hedge about 10% of your current portfolio market value against the likely decline in the stock market. Assume Xf = number of units of futures positions. and Xs= number of units of spot positions.

A) Explain what is meant by hedging, and define (show formula) the hedge ratio based on the above information. Hedging is an advanced risk man

B) Write the statistical formula for the optimal hedge ratio (mathematical statement).

C) Suppose you are provided with the following results from a regression analysis: Pspot= 335+0.85*Pfutures.

D) Calculate the number of units (futures contracts) that will much your stock portfolio of $100 million.

E) Calculate the optimal number of units (futures contracts) that will much your portfolio of $100 million, using the optimal hedge ratio (to minimize the overall portfolio variance).

F) Calculate the optimal number of units (futures contracts) for hedging the 10% of your portfolio, using the optimal hedge ratio (to minimize the overall portfolio variance).