Problem:

The following table gives data on daily changes in the spot price and futures price for a certain commodity:

∆S    +5    +8    -2    +3    -5    +0    -2    +7    +3    +7

∆ F    +2    +4    -1    +0    +1    -1    -7    +2    +5    +8

(a) Use the data to calculate a minimum variance hedge ratio for an investor who holds the commodity and plans to sell it soon. Ignore tailing adjustments to account for daily settlement.

(b) Evaluate how well a hedging strategy based on the minimum variance hedge ratio would have worked for each day of the 10-day period covered by the data, i.e. compute the value of your hedge for each of the ten days by adding losses/ gains from both the spot and futures positions.

(c) What is the cumulative gain/ loss over the 10 days?

(d) What is the daily standard deviation in your gain/ losses?

(e) What is the daily standard deviation without your hedge?

(f) What is the daily standard deviation if you use a (not optimal) hedge of 1 short position in the futures?

Summary of problem:

The question belongs to Finance and it discusses about calculation of minimum variance hedge ratio for 10 days by adding losses/gains from both spot and futures positions.

Total Word Limit: 109 Words