On May 10, Indian Aluminium Products Limited estimates that it will require 60 MT of aluminium on June 5. The spot price of aluminium on May 10 is INR 89.50. It wants to hedge the risk of an increase in the price of aluminium in the future and decides to hedge this price risk using aluminium futures in MCX India. The futures contracts are available with delivery on June 20, with a futures price of INR 90.90. The contract size for the aluminium futures is 5 MT. The manager has estimated that the standard deviation of changes in the spot price is 10, the standard deviation of changes in the futures price is 11, and the correlation between the changes in the spot price and futures price is 0.96
1. How should Indian Aluminium Products Limited hedge this exposure?
2. If the spot price of aluminium on June 5 is INR 91.25 and the futures price on June 5 is INR 92.40, what is the result of the hedge when compared to not hedging the exposure with futures?