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Find the minimum variance hedge ratio

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Reference no: EM132798415

You are a portfolio manager and you would like to hedge a portfolio daily over a thirty-day horizon using futures. The table below provides data on the values of the spot portfolio and the futures that will be used as a hedging instrument:

a) Use the data to find the minimum variance hedge ratio you would use to achieve the hedge.

b) Using the hedge ratio from a., calculate the daily change in value of the hedged portfolio.

c) What is the standard deviation of changes in value of the hedged portfolio? How does this compare to the standard deviation of changes in the unhedged spot position?

Day Spot Futures

0 80 81
1 79.635 80.869
2 77.88 79.092
3 76.4 77.716
4 75.567 77.074
5 77.287 78.841
6 77.599 79.315
7 78.147 80.067
8 77.041 79.216
9 76.853 79.204
10 77.034 79.638
11 75.96 78.659
12 75.599 78.549
13 77.225 80.512
14 77.119 80.405
15 77.762 81.224
16 77.082 80.654
17 76.497 80.233
18 75.691 79.605
19 75.264 79.278
20 76.504 80.767
21 76.835 81.28
22 78.031 82.58
23 79.185 84.03
24 77.524 82.337
25 76.982 82.045
26 76.216 81.252
27 76.764 82.882
28 79.293 84.623
29 78.861 84.205
30 76.192 81.429

Reference no: EM132798415

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