The Tailed Hedge Ratio (Which Takes into Account Daily Resettlement

question 4

Multiple Choice

The tailed hedge ratio (which takes into account daily resettlement of the futures contract) is smaller than the untailed one in absolute value.Which of these statements is true in relation to this mathematical fact?

• A)The interest earned or lost on the daily mark-to-market gains and losses increases the volatility of the changes in value of the hedging futures position,thereby reducing the hedge ratio.
• B)The volatility of interest rates makes the correlation of spot and futures lower,and enhances basis risk between the spot and futures markets.
• C)If nominal interest rates were constant,the tailed and untailed hedge ratios would be the same.
• D)If real interest rates were constant,the tailed and untailed hedge ratios would be the same.

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