Historical analysis of recent changes in exchange rates in both the spot and futures markets for a given currency reveals that spot rates are thirty percent more sensitive than futures prices.Given this information, the hedge ratio for this currency is
A)0.70.
B)0.77.
C)1.30.
D)1.43.
E)1.86.

Question

Quizplus · Accepted Answer

The hedge ratio is the ratio of the change in the futures price to the change in the spot price. In this case, the spot rates are thirty percent more sensitive than futures prices, so the hedge ratio is 1 / (1 + 0.3) = 0.77.

Historical Analysis of Recent Changes in Exchange Rates in Both