The correlation between changes in price of a spot asset and futures asset is 99%. The standard deviation of changes in spot prices is $2, and that of futures prices is $3. What is the standard deviation of a position that is long 5 units of the spot asset and is hedged by shorting 4 units of futures?
A) 1.5
B) 2.0
C) 2.5
D) 3.0
Correct Answer:
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Q1: You are hedging a spot position with
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Q4: Using a linear regression of changes
Q5: If changes in spot and futures
Q6: The tailed minimum-variance hedge ratio becomes lower
Q7: "Basis" risk may arise in a hedging
Q8: If changes in spot and futures
Q9: Suppose you want to hedge a futures
Q10: The covariance of changes between the spot
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