Which of the Following Statements Is Incorrect with Respect to Cross-Hedging

question 60

Multiple Choice

Which of the following statements is incorrect with respect to cross-hedging?

• A) Even when the futures contract is highly correlated with the portfolio being hedged, the value of the futures contract may change by a higher or lower percentage than the portfolio's market value.
• B) If the futures contract value is more volatile than the portfolio value, hedging will require a greater amount of principal represented by the futures contracts.
• C) The effectiveness of a cross-hedge depends on the degree of correlation between the market values of the two financial instruments.
• D) If the price of the underlying security of the futures contract moves closely in tandem with the security being hedged, the futures contract can provide an effective hedge.
• E) All of the above are correct with respect to cross-hedging.

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Definitions:

Rate Of Return

A measure of the profitability of an investment, calculated as a percentage of the original investment.

Net Value

The difference between the total benefits and total costs associated with an economic activity or transaction.

Long Run Deficit

A fiscal situation where a government consistently spends more than it earns over an extended period, leading to sustained budget deficits.