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Suppose company A today enters a contract with company B for delivering 10,000 units of commodity c three months from today. Company A wants to hedge the risk of this position. Unfortunately, there is no futures market for commodity c. There is, however, a futures market for commodity d that includes a futures contract with maturity of three months. Suppose that it is found from historical data that the standard deviation of the commodity-c price is σc = 0.02, the standard deviation of the commodity-d three-month futures price is σd = 0.01, and the correlation between the two is 0.8. Find the hedging strategy with the minimal variance, and compute this minimal variance.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92093993

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