# Problem 3 - P roblem 3.12 Suppose that in Example 3.4 the...

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Problem 3.12. Suppose that in Example 3.4 the company decides to use a hedge ratio of 0.8. How does the decision affect the way in which the hedge is implemented and the result? If the hedge ratio is 0.8, the company takes a long position in 16 NYM December oil futures contracts on June 8 when the futures price is \$68.00. It closes out its position on November 10. The spot price and futures price at this time are \$75.00 and \$72. The gain on the futures position is (72-68.00)*16,000=64,000 The effective cost of the oil is therefore 20,000*75-64,000=1,436,000 or \$71.80 per barrel. (This compares with \$71.00 per barrel when the company is fully hedged.) Problem 3.16. The standard deviation of monthly changes in the spot price of live cattle is (in cents per pound) 1.2. The standard deviation of monthly changes in the futures price of live cattle for the closest contract is 1.4. The correlation between the futures price changes and the spot price changes is 0.7. It is now October 15. A beef producer is committed to purchasing 200,000 pounds of live

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Problem 3 - P roblem 3.12 Suppose that in Example 3.4 the...

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