You are hedging a spot position with futures. If the spot asset is more volatile than the corresponding futures, the minimum-variance hedge ratio is
A) Greater than 1.
B) Exactly equal to 1.
C) Less than 1.
D) Indeterminate, given the information available.

Question

Quizplus · Accepted Answer

If the spot asset is more volatile than the corresponding futures, it implies that the spot price changes more than the futures price. In this scenario, the minimum-variance hedge ratio will be less than 1, indicating that the position in the futures contract should be smaller than that of the spot position. A smaller futures position will help offset the potential losses or gains from the spot position.

You Are Hedging a Spot Position with Futures