Berkshire hathaway inc nyse brka would like to hedge its 5, Ask an Expert

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Berkshire Hathaway Inc. (NYSE: BRK.A) would like to hedge its $5 million exotic insurance portfolio by using S&P 500 futures. Having heard about your excellent grades in the Derivatives class, Berkshire chairman Warren E. Buffett has hired you as a consultant to help construct this hedging trade. Mr. Buffett believes that the correlation between the returns of his insurance portfolio and that of index futures is -0.52. He also provides you that the standard deviation of the returns of the insurance portfolio and index futures is 5% and 2% respectively. Assuming that one contract of index futures has a value of $180,000 today, how many contracts should Mr. Buffett buy or sell for the best hedge?

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Financial Management, Finance

Category:- Financial Management
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