Discuss how large would your short position in Frankfurter Sausage need to be to hedge as far as possible against movements in the price of Swiss Roll?

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Subject: Finance

Topic: Activity 4

Paper details:

Your investment bank has an investment of $100 million in the stock of the Swiss Roll Corporation and a short position in the stock of the Frankfurter Sausage Company. Here is the recent price history of the two stocks:

Percentage price change

Month

Frankfurter Sausage

Swiss Roll

January

-10%

-10%

February

-10%

-5%

March

-10%

0%

April

10%

0%

May

10%

5%

June

10%

10%

On the evidence of these six months, how large would your short position in Frankfurter Sausage need to be to hedge as far as possible against movements in the price of Swiss Roll?

Please explain your answer in detail and provide in-text citations.
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12488094 | Activity 4.xlsx