The Correlation Between Changes in Price of a Spot Asset

question 23

Multiple Choice

The correlation between changes in price of a spot asset and futures asset is 90%. The standard deviation of changes in spot prices is $2, and that of futures prices is $2.50. The hedge ratio that minimizes hedge variance is

• A) 0.70
• B) 0.72
• C) 0.80
• D) 0.85

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Definitions:

Warranty Expense

The estimated cost related to the future servicing of products sold that is recognized as an expense by a company.

Extended Warranty

An extended warranty is an additional warranty covering the repair and maintenance of items beyond the standard warranty period, usually at an extra cost.

FICA Payroll Tax

Federal taxes in the United States that fund Social Security and Medicare, required to be withheld from employees' paychecks and also matched by employers.

Social Security

A government program that provides monetary assistance to people with inadequate or no income, primarily focused on retirees, disabled individuals, and survivors of deceased workers.