Which of the Following Is NOT True Regarding Hedge Ratio

question 59

Multiple Choice

Which of the following is NOT true regarding hedge ratio?

• A)When there is no basis risk hedge ratio is equal to one.
• B)When h = 1, both spot and futures are expected to change together by the same absolute amount.
• C)When h = 1, FX risk of the cash position should be hedged dollar for dollar by buying FX futures.
• D)When basis risk is present, the spot and future exchange rates are expected to move imperfectly together.
• E)The FI must sell a greater number of futures when there is basis risk than it has to when basis risk is absent.

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