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A trader owns 55,000 troy oz of silver and decides to hedge with 6-month silver futures...

A trader owns 55,000 troy oz of silver and decides to hedge with 6-month silver futures contracts. Each futures contract is on 5,000 troy oz. The standard deviation of the change in the spot price of silver is 0.43. The standard deviation of the change in silver futures prices is 0.40. The coefficient of correlation between the two is 0.95.

a) What is the minimum variance hedge ratio?

b) What is the optimal number of futures contracts without tailing the hedge?

c) What is the optimal number of futures contracts with tailing the hedge?

Tailing the Hedge is the procedure for adjusting the number of futures contracts used in hedging to reflect daily settlement.

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Answer #1

Please look into these numbers in the following tables whith all the relevant answers.

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