Price changes of two gold-mining stocks have shown strong positive correlation. Their historical relationship is: Average percentage change in A = 0.001 + 0.71(percentage change in B) Changes in B explain 60% of the variation of the changes in A (R2 = 0.6). a. Suppose you own $114,000 of
A. How much of B should you sell to minimize the risk of your net position? Amount of B to sell b. What is the hedge ratio? (
Hedge ratio Here is the historical relationship between stock A and gold prices: Average percentage change in A = -0.002 +1.38(percentage change in gold price)
C-1. If R2 = 0.46, can you lower the risk of your net position by hedging with gold (or gold futures) rather than with stock B? Yes No
c-2. Will this provide as good of a hedge as the sale of stock B?