Hedging Calculation

Q1&2:

Rtdaily=Pt-Pt-1Pt-1

Table1. Prices and daily returns of stock and index

Period | AZN-LN | FTSE ALL SHARE PriceClose | Rts % | Rti % |

4,340.50 | 3,600.19 | | -0.6751% | -0.1165% |

4,370.00 | 3,604.39 | | 0.5638% | 0.3195% |

4,345.50 | 3,592.91 | | -0.3783% | 0.2086% |

4,362.00 | 3,585.43 | | 0.2068% | -0.7502% |

4,353.00 | 3,612.53 | | -0.4687% | -0.2997% |

… | … | … | … | … |

3,213.50 | 3,377.60 | | -0.7566% | -0.6471% |

3,238.00 | 3,399.60 | | 3.3184% | 2.9623% |

3,134.00 | 3,301.79 | | -1.2291% | -1.0412% |

3,173.00 | 3,336.53 | | 0.6982% | -0.0623% |

3,151.00 | 3,338.61 | | | |

Table 2. Index statistics

Characteristics | Calculation Formula | Value |

Total days | T | 260 |

Historical average of simple daily return | Rdi=1Tt=1TRdi,t | 0.0309% |

Annualized expect return | Rai=TRdi | 8.0349% |

Daily standard deviation | бdi=t=1T(Rdi,t-Rdi) | 0.006159 |

Annualized standard deviation | бai=Tбdi | 0.099312 |

Variance of index daily return | Var(Rdi) | 0.000038 |

Risk free interest rate | Rf | 3% |

Table 3. Stock statistics

Characteristics | Calculation Formula | Value |

Total days | T | 260 |

Daily standard deviation | бds=t=1T(Rds,t-Rds) | 0.015460 |

Annualized standard deviation | бas=Tбds | 0.249286 |

Correlation | | 0.345101 |

Covariance | | 0.000033 |

Beta | β=Cov(Rds,Rdi)Var(Rdi) | 0.862914 |

Expected return | Res=Rf+β(Rai-Rf) | 7.3446% |

Hedging Strategies

Q3:

Strategy 1 – Minimum-variance hedging

Table4. Stock and Forwards

Characteristics | Calculation Formula | Value |

Wealth at T1 | W1 | ￡100,000 |

Stock price at T1 | S1 | 4,340.50 |

Stock price at T2 | S2=S1(1+Res) | 4,659.2924 |

Forward price at T1 | F1=S1(1+Rf) | 4,470.7150 |

Forward price at T2 | E(F2)=S2=S1(1+Res) | 4,659.2924 |

Forward price standard deviation | бF=бas | 0.249286 |

Correlation of spot price and forward price | | 1 |

Amount of underlying stock to be...