Futures market transactions are commonly used to reduce risk.The most risk reduction can be obtained when the asset at risk and the futures contract:
A)have different maturities.
B)have payoff schedules that differ.
C)have differing volatilities.
D)have uncorrelated price movements.
E)have perfectly correlated price movements.

Question

Quizplus · Accepted Answer

The most risk reduction in futures market transactions is achieved when the asset at risk and the futures contract have perfectly correlated price movements. This ensures that any loss in the value of the asset is offset by gains in the futures contract, and vice versa, effectively hedging the risk.

Futures Market Transactions Are Commonly Used to Reduce Risk