Question
You would like to hedge a sale of 10 tons of dragon fruits but the only available futures contract is for Frozen Concentrated Orange Juice
You would like to hedge a sale of 10 tons of dragon fruits but the only available futures contract is for Frozen Concentrated Orange Juice (FCOJ). The expected price of dragon fruits is $800 per ton with standard deviation of $200. The expected price of FCOJ is $300 per gallon with standard deviation of $40 per gallon. The correlation between the price of dragon fruit (per ton) and FCOJ (per gallon) is 0.7. If you use the FCOJ contracts to construct the best available hedge, what will be the standard deviation of your revenue? Round your answer to the nearest dollar.
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