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Unformatted text preview: • The net loss is2,775 + 2,300 = $475 4 Short hedge lost • Notice that here (but not always) the net loss per ounce of gold is equal to the change in the basis. bt  b0 = (St Ft)  (S0  F0)4.75 = (405.65408.50)  (433.40431.50) 5 Choice of Contract • Choose a delivery month that is as close as possible to, but later than, the end of the life of the hedge • When there is no futures contract on the asset being hedged, choose the contract whose futures price is most highly correlated with the asset price. 6 1:1 Hedge ratio • Our gold dealer used a 1:1 hedge ratio. • Here the hedge ratio, h, is h = size of futures position size of cash market position • Was this “optimal”? • A minimum variance hedge ratio would minimize the variance of possible outcomes. 7...
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 Spring '12
 LucyAckert
 $2,300, $2,775, $405.65, $408.50, $475 4

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