Forward and future quiz 2

naresh.thkr
Good Student
Posts: 25
Joined: Sat Aug 11, 2012 7:02 pm

Forward and future quiz 2

Postby naresh.thkr » Sat Nov 10, 2012 6:00 pm

If two securities have the same volatility and a correlation equal to -0.5, their minimum variance hedge ratio is
Choose one answer.
a. 4:1
b. 2:1
c. 16:1
d. 1:1

Hi, Can any one explain the concept.


Thnx
Naresh.

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content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: Forward and future quiz 2

Postby content.pristine » Mon Nov 12, 2012 2:40 pm

The optimal hedge ratio = correlation * standard deviation 1/standard deviation 2
= 0.5
= 0.5:1 = 1:2
Hence B is the answer..

8-)


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