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anbu.edu
Finance Junkie
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Joined: Mon Feb 04, 2013 3:35 pm

FMP

Postby anbu.edu » Mon Oct 07, 2013 6:28 am

A bronze producer will sell 1,000 mt (metric tons) of bronze in three months at the prevailing market price at that time. The standard deviation of the price of bronze over a three-month period is 2.6%. The company decides to use three-month futures on copper to hedge. The copper futures contract is for 25 mt of copper.
The standard deviation of the futures price is 3.2%. The correlation between three-month changes in the futures price and the price of bronze is 0.77. To hedge its price exposure, how many futures contracts should the company buy/sell?
Choose one answer.
Choose one answer.
a. Buy 25 futures
b. Sell 25 futures
c. Buy 63 futures
d. Sell 38 futures

A bronze producer will sell 1,000 mt (metric tons) of bronze in three months -which means he is in long position which means we have to short 25 futures.. but the answer is long . can you please explain were did i go wrong

pradeeppdy
Finance Junkie
Posts: 258
Joined: Thu Sep 20, 2012 3:42 pm

FMP

Postby pradeeppdy » Wed Oct 09, 2013 11:05 am

You are correct answer is wrong here, Here need to short 25 futures.


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