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    Risk Management and Derivatives: Metallgesellshaft

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    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?

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    First, let us define what is meant by minimum volatility hedge ratio which is also denoted by minimum variance hedge ratio. This ratio is simply the ratio of the futures position relative to the spot position which minimizes the variance of the position. Let me state this with regard to Metallgesellshaft. The minimum volatility hedge ratio of 0.70 is the ratio of the FUTURES contract that the company enters relative to its 10-year exposure ...

    Solution Summary

    Risk management and derivatives for Metallgesellshaft is examined.