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.

Question

Quizplus · Accepted Answer

A naive hedge occurs when a cash asset is hedged on a direct dollar-for-dollar basis with a forward or futures contract. This approach assumes that the value of the cash asset and the value of the future or forward contract will move in perfect correlation, which may not always be the case. This type of hedge is considered simplistic or naive because it ignores other factors that may affect the value of the asset or the contract, such as interest rates, dividends, or counterparty risk.

A Naive Hedge Occurs When