Suppose You Want to Hedge a Futures Contract a with Another

question 21

Multiple Choice

Suppose you want to hedge a futures contract A with another futures contract B.You calculate the minimum-variance hedge ratio ignoring daily resettlement (for example,by regressing daily changes in Contract A's prices on daily changes in Contract B's prices) .Suppose,however,that both contracts are marked-to-market daily.Which of the following statements is always true?

• A)The tailed hedge ratio is lower than the untailed one.
• B)The tailed hedge ratio is equal to the untailed one.
• C)The tailed hedge ratio is greater than the untailed one.
• D)None of the above is always true.

---

Definitions:

Quantity Discounts

Quantity discounts refer to the reductions in price given by suppliers to buyers based on the volume of goods purchased.

Quantity Discounts

Price reductions offered to customers who purchase in large volumes, encouraging bulk buying and fostering customer loyalty.

Unit Costs

The cost incurred to produce, store, and sell one unit of a product, including materials, labor, and overhead expenses.

Noncumulative Quantity Discounts

Price reductions offered for large purchases made in a single order, as opposed to discounts accumulated over time through multiple purchases.