When will the estimated hedge ratio be greater than one?
A)When spot rate changes are greater than futures rate changes.
B)When spot rate changes are less sensitive than futures price changes over time.
C)When spot rate changes are equally sensitive as futures price changes over time.
D)When basis risk is absent.
E)When the spot and future exchange rates are expected to move perfectly together.

Question

Quizplus · Accepted Answer

A hedge ratio greater than one means that the investor needs to take a larger futures position relative to his spot position to fully hedge against risk. This occurs when the spot rate changes are greater than futures rate changes, indicating that the investor needs to take on more risk in order to fully hedge their exposure.

When Will the Estimated Hedge Ratio Be Greater Than One