Within the futures market, to be fully hedged means:
A)Buying a sufficient number of futures contracts so that the loss of net worth on the FI's balance sheet when interest rates rise is just offset by the gain from the off-balance-sheet selling of futures when interest rates rise.
B)Selling a sufficient number of futures contracts so that the loss of net worth on the FI's balance sheet when interest rates rise is just offset by the gain from the off-balance-sheet selling of futures when interest rates rise.
C)Selling a sufficient number of futures contracts so that the gain of net worth on the FI's balance sheet when interest rates rise is just offset by the gain from the off-balance-sheet selling of futures when interest rates rise.
D)None of the listed options are correct.

Question

Quizplus · Accepted Answer

Being fully hedged in the futures market means offsetting the loss from a decline in the value of the underlying asset with an equivalent gain from selling futures contracts. Therefore, to be fully hedged, an FI should sell a sufficient number of futures contracts so that the loss of net worth on its balance sheet when interest rates rise is just offset by the gain from selling futures contracts when interest rates rise. Option B is the correct choice as it explains the process of being fully hedged.

Within the Futures Market, to Be Fully Hedged Means