If Changes in Spot and Futures Prices Are Perfectly Correlated $+ 1$

question 6

Multiple Choice

If changes in spot and futures prices are perfectly correlated over the horizon of a hedge,then

• A)The minimum variance hedge ratio is \(+ 1\)
• )
• B)The variance of cash flows from a hedged position under the minimum-variance hedge ratio is zero.
• C)The net cash flow at maturity of the hedge is zero.
• D)The standard deviation of spot price changes must equal the standard deviation of futures price changes.

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Definitions:

Formal Credit Instrument

A legal document that represents an agreement to extend credit, specifying the terms under which credit is provided and must be repaid.

Maturity Date

The specified date on which the principal amount of a financial instrument is due to be paid in full.

Note's Issue Date

The date on which a promissory note or bond is issued, marking the beginning of the obligation.

Due Date

The due date is a specific date by which an obligation, such as a payment or task, must be completed.