What Must Be the Daily Interest Rate (Expressed in Continuously-Compounded

question 11

Multiple Choice

What must be the daily interest rate (expressed in continuously-compounded and annualized terms) for the tailed hedge ratio to be 90% of the untailed one for a one-year hedge? Assume a hedging horizon of 365 days.

• A) 10%
• B) 15%
• C) 20%
• D) 25%

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Definitions:

Holt-Winters Additive Model

A forecasting technique that extends exponential smoothing to capture seasonality and trend in time series data.

Seasonality

Periodic fluctuations in data or phenomena that occur regularly based on a season, quarter, month, etc.

Mean Absolute Deviation

The average of the absolute differences between each data point and the mean of the data set.

Root Mean Square Error

A measure of the differences between values predicted by a model and the values actually observed, expressed as the square root of the mean of these differences squared.