A company anticipates the purchase British pounds in 6 months. The standard deviation ofthe change in British pounds over a 6-month period is calculated to be 9%. The company chooses to hedge their exposure by buying future contracts on EUR. The standard deviation ofthe change in the futures price over a 6- month period is calculated to be 10% and the correlation coefficient between British pounds and EUR is 0.70. Calculate the optimal hedge ratio.
A. 1.0
B. 0.90
C. 0.70
D. 0.63
Answer: D
Optimal hedge ratio= 0.07 *0.09/0.10 =0.63