SO i'm taking a futures class and i'm a bit confused about what's going on
Homework 3
It is March 2008. You are a mining firm, and you will have 200,000 ounces of gold ready for sale in September 2008. You decide to hedge October 2008 gold futures contract.
Questions
1a. Compute a hedge ratio, using the daily data.
1b. What is the size of the hedge, using daily data? (100 ounces per contract)
2a. Compute a hedge ratio, using the weekly data.
2b. What is the size of the hedge, using weekly data?
3a. Should we take the hedge?
I have all the data for the daily / weekly prices for futures + cash prices....how do i find the hedge ratio/size of the hedge..and how do i kno if its a hedge to take? --- i'm completely lost right now...any clarification would be great...thanks
You're gonna have to calculate the standard deviation of your portfolio as well as the standard deviation of the contract prices. Find the correlation between them and compute the hedge ratio using the formula that you should have in your textbook/notes.
Once you have hedge ratio, you simply multiply that by the size of the portfolio divided by size of one contract.
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