A food processing company knows that it will buy 1 million bushels of corn in three months. The standard deviation of the change in the price per b of bushel over a 3-month period is calculaed 0.055 (5.5%). The company chooses to hedge by buying futures contracts on corn. The sandard deviation of the change in the futures price over 3-month period is 0.065 (6.5%) and the coefficient of correlation between the 3-month change in the price of corn and 3-month change in the futures price is 0.75.
a. What is the optimal hedge ratio?
b. One Corn contract is 50,000 bushels. How many contracts should the company entered?