You Are Hedging a Spot Position with Futures

question 16

Multiple Choice

You are hedging a spot position with futures. If the spot asset is more volatile than the corresponding futures, the minimum-variance hedge ratio is

• A) Greater than 1.
• B) Exactly equal to 1.
• C) Less than 1.
• D) Indeterminate, given the information available.

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Definitions:

Capital Account Balances

The net result of public and private international investments flowing in and out of a country, showing changes in national ownership of assets.

Noncash Assets

Assets that cannot be quickly converted to cash, including property, plant, and equipment, and often valued at cost or depreciated cost on the balance sheet.

Liquidation Expenses

Costs incurred during the process of selling off assets or winding up a business, including legal fees, auctioneer fees, and other related expenses.

Cash Distribution

The payment of earnings or capital to shareholders, partners, or members from a corporation, partnership, or other entity, typically in the form of cash.