Which of the following statements is/are correct about the reasons why hedging is difficult to do perfectly?
I. Available futures contract sizes may not match the hedging needs of the firm.
II. There may be a change in the relationship between the futures price and the local spot price.
A) I only
B) II only
C) Both I and II
D) Neither I nor II

Question

Quizplus · Accepted Answer

Both statements are correct. In regards to statement I, futures contracts are often standardized in terms of the underlying asset and contract size, which may not always match the precise hedging needs of a firm. In regards to statement II, the relationship between futures prices and spot prices can be affected by various factors such as changes in interest rates or unexpected events, making it difficult to accurately predict and hedge against price movements.

Which of the Following Statements Is/are Correct About the Reasons