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.

Question

Quizplus · Accepted Answer

The estimated hedge ratio is the ratio of the change in the price of the underlying asset (e.g. currency) to the change in the price of the futures contract. If the spot rate changes are greater than the futures rate changes, it means that the underlying asset is more volatile than the futures contract. In this case, the estimated hedge ratio will be greater than one, as investors will need to purchase more futures contracts to fully hedge their exposure to the underlying asset.

When Will the Estimated Hedge Ratio Be Greater Than One