Question:
Suppose that Metallgesellshaft had 10-year exposures and that the minimum-volatility hedge ratio before trailing is 0.7. Assume that the 10-year interest rate is 10 percent. What is the effective long position in oil of Metallgesellshaft per barrel if it uses a hedge ratio of 1 per barrel? Does Metallgesellshaft have a greater or lower exposure to oil prices in absolute value if it uses a hedge ratio of 1 or a hedge ratio of 0?