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:

Extrinsic Motivation

Motivation that is driven by external rewards such as money, fame, grades, or praise, in contrast to intrinsic motivation, which is driven by personal satisfaction or interest.

Extrinsic Motivation

Encouragement stemming from external factors including wealth, recognition, scores, and compliments.

Intrinsic Motivation

The drive to perform an activity for its inherent satisfaction or pleasure, rather than for some separable consequence.

Organismic Needs

Fundamental human needs identified in various psychological theories that are innate and drive behavior, such as physiological, safety, love, and esteem needs.