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In practice, even without maturity and underlying mismatch, hedging using futures does not always require a one-to-one hedge ratio. Tailing factor needs to be considered. Suppose the current spot price is $3. With 50 percent of the probability, the spot price will increase or decrease by 1 dollar for each year as shown in the graph below. If the annual discrete compounding risk-free rate is 10%, and the cost of carry offsets the convenience yield exactly, then what is your hedging strategy?

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  • $\begingroup$ Where did the graph go? $\endgroup$ – SRKX Nov 2 '15 at 5:02
  • $\begingroup$ I am unable to upload the picture $\endgroup$ – Sahab Nov 2 '15 at 5:06
  • $\begingroup$ Is that perhaps a self-study question? $\endgroup$ – Richard Hardy Feb 25 '16 at 20:22

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