Suppose You Want to Hedge a Futures Contract a with Another

question 7

Multiple Choice

Suppose you want to hedge a futures contract A with another futures contract B. You calculate the minimum-variance hedge ratio ignoring daily resettlement (for example, by regressing daily changes in Contract A's prices on daily changes in Contract B's prices) . Suppose, however, that both contracts are marked-to-market daily. Which of the following statements is always true?

• A) The tailed hedge ratio is lower than the untailed one.
• B) The tailed hedge ratio is equal to the untailed one.
• C) The tailed hedge ratio is greater than the untailed one.
• D) None of the above is always true.

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Definitions:

Vital Signs

Measurements critical to assessing the immediate health of an individual, including but not limited to, the rate of breathing, pulse, temperature, and blood pressure.

Sphygmomanometer Gauge

A device used to measure blood pressure, typically consisting of an inflatable cuff to restrict blood flow and a mercury or aneroid gauge to measure pressure.

Labored Breathing

Breathing that requires more effort than normal, often seen in conditions affecting the respiratory system.

Low Blood Pressure

A condition where blood pressure is much lower than normal, which can lead to symptoms like dizziness and fainting.