The number of contracts that need to be used to hedge a cash position is determined by the value of the cash flow to be hedged, the face value of the futures contract, the maturity of the anticipated cash flow, the maturity of the futures contract, and the ratio of the variability of the cash market to the variability of the futures market.

Question

Quizplus · Accepted Answer

The number of contracts needed for hedging a cash position indeed depends on various factors including the value of the cash flow to be hedged, the face value of the futures contract, the maturity dates of both the anticipated cash flow and the futures contract, and the ratio of the variability (volatility) of the cash market to the variability of the futures market. This is because all these factors influence the effectiveness of the hedge in mitigating risk.

The Number of Contracts That Need to Be Used to Hedge