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.

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Definitions:

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The process through which people are affected by the meanings and implications of nearby or associated concepts and ideas.

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the sources of influence and authority an individual or organization possesses, such as expertise, control of resources, or personal relationships.

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A principle in behavioral psychology where the introduction of a rewarding stimulus following a desired behavior increases the likelihood of that behavior being repeated in the future.