Which of the Following Statements Is Incorrect with Respect to Cross-Hedging

question 41

Multiple Choice

Which of the following statements is incorrect with respect to cross-hedging?

• A)Even when the futures contract is highly correlated with the portfolio being hedged, the value of the futures contract may change by a higher or lower percentage than the portfolio's market value.
• B)If the futures contract value is more volatile than the portfolio value, hedging will require a greater amount of principal represented by the futures contracts.
• C)The effectiveness of a cross-hedge depends on the degree of correlation between the market values of the two financial instruments.
• D)If the price of the underlying security of the futures contract moves closely in tandem with the security hedged, the futures contract can provide an effective hedge.
• E)All of the above are correct with respect to cross-hedging.

---

Definitions:

Economic Reform

A series of governmental policy changes aiming to improve economic efficiency by implementing market-oriented adjustments in the economic system.

Immediate Abolition

The instant termination of a practice or institution, commonly used in historical context to refer to the demand for the immediate end of slavery.

Pennsylvania Abolition Society

An organization founded in 1775 in Philadelphia, aimed at promoting abolition and the relief of free blacks unlawfully held in bondage.

Quakers

A religious group formally known as the Religious Society of Friends, known for their pacifist beliefs, simple living, and emphasis on direct, personal experience of God.