What is the optimal hedge ratio

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A food processing company knows that it will buy 1 million bushels of corn in three months. The standard deviation of the change in the price per b of bushel over a 3-month period is calculaed 0.055 (5.5%). The company chooses to hedge by buying futures contracts on corn. The sandard deviation of the change in the futures price over 3-month period is 0.065 (6.5%) and the coefficient of correlation between the 3-month change in the price of corn and 3-month change in the futures price is 0.75.

a. What is the optimal hedge ratio?

b. One Corn contract is 50,000 bushels. How many contracts should the company entered?

Reference no: EM131336746

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