You are hedging a spot position with futures.If the spot asset is less volatile than the futures,and there is basis risk,which of the following is surely false:
A)The minimum-variance hedge ratio is greater than 1.
B)The minimum-variance hedge ratio is less than or equal to 1.
C)The minimum-variance hedge ratio is negative.
D)The minimum-variance hedge ratio is not equal to 1.

Question

Quizplus · Accepted Answer

CThe minimum-variance hedge ratio is calculated based on the volatility of the spot asset relative to the futures. If the spot asset is less volatile than the futures, the hedge ratio (which is the ratio of the futures price change to the spot price change) would not exceed 1, making A surely false. A negative hedge ratio (C) implies that the spot and futures prices move in opposite directions, which is not necessarily true in this context.

You Are Hedging a Spot Position with Futures