Calculate the variance-minimizing hedge ratio, Finance Basics

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Calculate the variance-minimizing hedge ratio

Problem

A company expects to buy 1 million barrels of East Texas Intermediate (ETI) crude oil in 1 year. The annualized volatility of the price of a barrel of ETI crude is calculated at 12%. The company chooses to hedge by buying a futures contract on West Texas Intermediate (WTI) crude. The annualized volatility of the WTI futures is 17% and the correlation coefficient is 0.68. Calculate the variance-minimizing hedge ratio.

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Finance Basics: Calculate the variance-minimizing hedge ratio

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Finance Basics: Calculate the variance-minimizing hedge ratio

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