NOTE: THE CASE STUDY IS ON PG NO. 817 OF THE PDF AND PG NO. 789 OF THE BOOK
Section Case Study: Read “John Carter: Hedging” beginning on page 789 and analyze the following questions:
1.Assume that the output quantity of John Carter’s farm is known with certainty. Is it a good idea to hedge half the production? How much should Carter hedge? Note: There are 2000 pounds in a ton.
2.Now assume that the output quantity is uncertain. How does the correlation between output and prices affect Carter’s decision on how much to hedge? Prepare your analysis showing hedging decisions for correlations of -.99, 0, and .99.
3.Assuming output quantity is uncertain, which correlation would you use to make a hedging decision? How much should Carter hedge assuming that correlation