Consider the P/E ratios of the following companies: Company A: 7.4 Company B: 11.3 Company C: 14.8 Company D: 9.1 Among these fo
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Answer:
hello your question is incomplete below is the complete question and the missing table
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: on the evidence of these six months how large would your short position in Frankfurter sausage needed to be to hedge you as far as possible against movements in the price of swiss Roll
answer : $42003667
Explanation:
$100 million in stocks
According to the data provided in the table attached below, to short the Frankfurt in order to hedge investment in Rolls is calculated below
we have to calculate the total return on both Roll corporation and Frankfurter sausage
for f-sausage
∑ (1 + monthly returns ) / 100
= ( 1 - 0.1 + 1 - 0.1 .... + 1 + 0.1 ) = -0.0297 = -2.97%
for Roll corporation
∑ (1 + monthly returns ) / 100
= ( 1 - 0.1 + 1 - 0.05 .... + 1 + 0.1 ) = -0.012475 = - 1.24%
next we will calculate the total loss inquired when investing in Roll corporation
Total loss = percentage loss * total investment
= 0.012475 * $100 million = - $ 1247500
we will have to offset the loss by shorting investments in F sausage
hence : $1247500 = investment in sausage * total return
1247500 = investment in sausage * 0.0297 ( The total return of F sausage is positive because it was a short position )
hence short investment in F sausage to offset loss incurred in ROLLS INVESTMENT
= 1247500 / 0.0297 = $42003667
