If the futures contract used to hedge a spot position is marked-to-market daily,then the minimum-variance hedge ratio formula $h ^ { * } = \rho \times \sigma ( \Delta S ) / \sigma ( \Delta F )$ computed ignoring daily resettlement is,in absolute terms,
A)Biased downwards.
B)Unbiased.
C)Biased upwards.
D)Biased downwards only if interest rates are nonzero.

Question

Quizplus · Accepted Answer

The tailed hedge ratio (denoted $h ^ { ** } i$n the text)is obtained by multiplying the untailed hedge ratio by a factor that is less than one.

If the Futures Contract Used to Hedge a Spot Position h∗=ρ×σ(ΔS)/σ(ΔF)h ^ { * } = \rho \times \sigma ( \Delta S ) / \sigma ( \Delta F )h∗=ρ×σ(ΔS)/σ(ΔF)

If the Futures Contract Used to Hedge a Spot Position $h ^ { * } = \rho \times \sigma ( \Delta S ) / \sigma ( \Delta F )$