Though a cross hedge has somewhat higher risk than an ordinary hedge,it will reduce risk if which of the following occurs?
A)futures prices are more volatile than spot prices
B)the spot and futures contracts are correctly priced at the onset
C)spot and futures prices are positively correlated
D)futures prices are less volatile than spot prices
E)none of the above

Question

Quizplus · Accepted Answer

Cross hedging involves using a futures contract on a different but related asset to hedge a position. If spot and futures prices are positively correlated, the futures contract can effectively offset price movements in the spot market, thereby reducing risk.

Though a Cross Hedge Has Somewhat Higher Risk Than an Ordinary