What does a low value of R² indicate when performing a linear regression of the relationship between changes in spot prices and changes in futures prices? A)It means the degree of confidence increases in the use of futures contracts, with a given hedge ratio estimate, to hedge cash asset-risk position. B)It means that we have little confidence that the slope coefficient from the regression is actually the true hedge ratio. C)It indicates that there is no statistical association at all between spot rates and future prices. D)It indicates that the regression line does not fit the scatter of observations. E)It indicates a low value of hedging ineffectiveness.

Question

Quizplus · Accepted Answer

A low value of R² indicates that there is little confidence that the slope coefficient from the regression is actually the true hedge ratio. In other words, the relationship between changes in spot prices and changes in futures prices is weak and the regression line may not accurately represent the actual relationship between the two variables. This means that using futures contracts to hedge cash asset-risk position may not be an effective strategy.

What Does a Low Value of R2 Indicate When Performing

What Does a Low Value of R² Indicate When Performing