Which of the Following Is NOT True Regarding Hedge Ratio

question 59

Multiple Choice

Which of the following is NOT true regarding hedge ratio?

• A)When there is no basis risk hedge ratio is equal to one.
• B)When h = 1, both spot and futures are expected to change together by the same absolute amount.
• C)When h = 1, FX risk of the cash position should be hedged dollar for dollar by buying FX futures.
• D)When basis risk is present, the spot and future exchange rates are expected to move imperfectly together.
• E)The FI must sell a greater number of futures when there is basis risk than it has to when basis risk is absent.

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Definitions:

Bond Investments

Financial securities that represent a loan made by an investor to a borrower, typically corporate or governmental, that pays periodic interest payments and the return of principal at maturity.

Interest Income

Earnings received from investments in debt instruments such as bonds, loans, or savings accounts.

Carrying Amount

The value at which an asset or liability is recognized on the balance sheet, factoring in depreciation or amortization and impairment if applicable.

Market Rate Of Interest

The prevailing rate at which interest is paid by borrowers for loans in the financial markets.