When performing a linear regression of the relationship between changes in spot prices and changes in futures prices, what does R² = 0 indicate? A)Changes in the spot rate and changes in the futures price are perfectly correlated. B)All observations between changes in spot rate and changes in futures price lie on a straight line. C)The spot and future exchange rates are expected to move imperfectly together. D)The FI must sell a greater number of futures to hedge the cash position. E)There is no statistical association between changes in spot rates and changes in futures price.

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Quizplus · Accepted Answer

R² = 0 indicates that there is no statistical association between changes in spot rates and changes in futures prices. This would suggest that changes in the spot price cannot be used to predict changes in futures prices, and vice versa. It is important to note that this does not necessarily mean that there is no relationship between spot and futures prices, but rather that this specific linear regression model did not find any significant association.

When Performing a Linear Regression of the Relationship Between Changes