22-83 What is the reason for decrease in the number of futures contract needed to hedge a cash position in case of tailing the hedge?
A)Lower average transaction costs resulting from higher number of transactions.
B)Interest income generated from reinvesting the cash flows generated by the futures contracts.
C)Lack of perfect correlation between spot and futures prices.
D)The effect of conversion factor.
E)Hedging only a proportion of balance sheet position.

Question

Quizplus · Accepted Answer

Tailing the hedge involves adjusting the number of futures contracts to account for the interest income that can be earned on the cash flows generated by the futures contracts. This reduces the number of contracts needed.

22-83 What Is the Reason for Decrease in the Number