A company expects to buy 1 million barrels of West Texas Intermediate crude oil in one year. The annualized volatility of the pric of a barrel of WTI is calculated as 18%. The company chooses to hedge using futures contract on Brent Crude. The futures contract is for 100,000 barrels. The annualized volatility of the Brent futures is 20% and the correlation coefficient between WTI crude oil and Brent futures is 0.89. To hedge its exposure and minimize the resulting variance, how many futures contracts shou the company buy/sell? Select one: a. Buy 8 futures contract b. Sell 8 futures contract c. Buy 9 futures contract d. Sell 9 futures contract

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Chapter1: Investments: Background And Issues
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A company expects to buy 1 million barrels of West Texas Intermediate crude oil in one year. The annualized volatility of the price
of a barrel of WTI is calculated as 18%. The company chooses to hedge using futures contract on Brent Crude. The futures
contract is for 100,000 barrels. The annualized volatility of the Brent futures is 20% and the correlation coefficient between WTI
crude oil and Brent futures is 0.89. To hedge its exposure and minimize the resulting variance, how many futures contracts should
the company buy/sell?
Select one:
a. Buy 8 futures contract
b. Sell 8 futures contract
c. Buy 9 futures contract
d. Sell 9 futures contract
Transcribed Image Text:A company expects to buy 1 million barrels of West Texas Intermediate crude oil in one year. The annualized volatility of the price of a barrel of WTI is calculated as 18%. The company chooses to hedge using futures contract on Brent Crude. The futures contract is for 100,000 barrels. The annualized volatility of the Brent futures is 20% and the correlation coefficient between WTI crude oil and Brent futures is 0.89. To hedge its exposure and minimize the resulting variance, how many futures contracts should the company buy/sell? Select one: a. Buy 8 futures contract b. Sell 8 futures contract c. Buy 9 futures contract d. Sell 9 futures contract
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