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:

Opposition

The movement that involves bringing the thumb and finger together.

Thumb

The first digit located on the lateral side of the hand, important for gripping and manipulating objects.

Olecranon Process

The pointed bone at the upper end of the ulna, around which the elbow joint forms and functions.

Musculocutaneous Nerve

A nerve in the arm that innervates the muscles of the anterior compartment of the forearm and provides sensation to the skin over the lateral aspect of the forearm.