If changes in spot and futures prices are uncorrelated,then
A)The minimum variance hedge ratio is zero.
B)Basis risk is zero.
C)Hedging the spot position with futures is effective because the portfolio is well-diversified.
D)The minimum variance hedge requires holding equal amounts of spot and futures.

Question

Quizplus · Accepted Answer

If changes in spot and futures prices are uncorrelated, there is no relationship between the two variables, and as such, there is no minimum variance hedge ratio. In other words, holding a futures position would not reduce the variance of the spot position, so there is no need to hedge.

If Changes in Spot and Futures Prices Are Uncorrelated,then