The tailed minimum-variance hedge ratio becomes lower in comparison to the untailed one when
A) Nominal interest rates rise and hedge maturity increases.
B) Real interest rates rise and hedge maturity decreases.
C) Nominal Interest rates fall and hedge maturity increases.
D) Real interest rates fall and hedge maturity decreases.

Question

Quizplus · Accepted Answer

The tailed minimum-variance hedge ratio accounts for the time value of money, which is affected by nominal interest rates. When nominal interest rates rise and hedge maturity increases, the present value of future cash flows decreases, leading to a lower tailed hedge ratio compared to the untailed one.

The Tailed Minimum-Variance Hedge Ratio Becomes Lower in Comparison to the Untailed