You Are Hedging a Spot Position with Futures

question 9

Multiple Choice

You are hedging a spot position with futures. If the spot asset is less volatile than the futures, and there is basis risk, which of the following is surely false:

• A) The minimum-variance hedge ratio is greater than 1.
• B) The minimum-variance hedge ratio is less than or equal to 1.
• C) The minimum-variance hedge ratio is negative.
• D) The minimum-variance hedge ratio is not equal to 1.

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Definitions:

Quasilinear Preferences

Preferences represented by utility functions where the marginal utility of consumption is constant irrespective of other goods consumed.

Indifference Curves

Graphical representations of different combinations of goods or services among which a consumer is indifferent, showing no preference for one combination over another.

Perfect Substitutes

Products or services that can be used in exactly the same way by the consumer and that are perceived as identical in satisfying an individual's needs or desires.

Perfect Complements

Goods that are consumed together in fixed proportions to fulfill a specific utility.