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FRM Part I · FRM Exam Part I · Using Futures for Hedging

A portfolio manager hedges a position in an asset using futures with a minimum-variance hedge ratio of 0.80 and a futures contract size of 1,000 units. The position is 50,000 units. The futures price is $40 and the spot price is $39. Ignoring tailing, how many futures contracts should be shorted?

Short 40 contracts. The hedge ratio of 0.80 scales the 50,000-unit exposure to 40,000 units, and dividing by the 1,000-unit contract size gives 40 contracts. Prices are not needed for this count before tailing is considered.

  1. A40Correct
  2. B50
  3. C62.5
  4. D41

Explanation

Number of contracts = h* x position / contract size = 0.80 x 50,000 / 1,000 = 40. Using 50 ignores the hedge ratio (treats it as 1). Using 62.5 divides by the hedge ratio instead of multiplying. Prices do not enter this count.

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