A naive hedge occurs when
A)an FI manager wishes to use futures or other derivative securities to hedge the entire balance sheet duration gap.
B)a cash asset is hedged on a direct dollar-for-dollar basis with a forward or futures contract.
C)an FI reduces its interest rate or other risk exposure to the lowest possible level by selling sufficient futures to offset the interest rate risk exposure of its whole balance sheet.
D)an FI purchases an insurance cover to the extent of 80% of losses arising from adverse movement in asset prices.
E)All of the options.

Question

Quizplus · Accepted Answer

A naive hedge is a simple, direct hedge that matches the risk exposure of a cash asset with a forward or futures contract. It does not consider other factors such as basis risk or basis point value. Option B describes a direct dollar-for-dollar hedge, which is an example of a naive hedge. Options A, C, and D describe more complex hedging strategies. Option E includes all options, but only option B matches the definition of a naive hedge.

A Naive Hedge Occurs When