Homework 2 (2).xlsx - It is March 2018 You are a mining...

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Unformatted text preview: It is March 2018. You are a mining firm, and you will have 200,000 ounces of gold ready for sale in September 2018. You decide to hedge October 2018 gold futures c Questions 1a. Compute a hedge ratio, using the daily data. HR= .392 1b. What is the size of the hedge, using daily data? (100 ounces per contract) Short 784 Futures Contracts 2a. Compute a hedge ratio, using the weekly data. HR= .948 2b. What is the size of the hedge, using weekly data? Short 1,896 Futures contracts 3a. Should we take the hedge? Yes we should take the hedge. 3b. Why or why not? While the HR calculated from daily is very low, we should still assume the hedge. If we hold our position till October, we will be less effected by daily price volatility asand the position will last months. On alater. weekly basis the HR is higher NOTE: Daily weekly data will7be provided than .80. Being that it is this high, the hedge ratio indicates that there is less basis risk associated with gold spot prices and the derivative contract. While the HR calculated from daily is very low, we should still assume the hegdge as we would hold our position for more than 7 months and not be as susceptible to daily price volatility. While the HR calculated from daily is very low, we should still assume the hedge. If we hold our position till October, we will be less effected by daily price volatility as the position will last 7 months. On a weekly basis the HR is higher than .80. Being that it is this high, the hedge ratio indicates that there is less basis risk associated with gold spot prices and the derivative contract. While the HR calculated from daily is very low, we should still assume the hegdge as we would hold our position for more than 7 months and not be as susceptible to daily price volatility. October 2018 gold futures contract. ...
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  • Winter '14
  • Forward contract, hedge ratio, weekly basis, weekly data

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