22-57 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.
E)All of the above.

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 cash asset and the futures/forward contract will move in perfect synchronization, which is not always the case. Using this approach can lead to basis risk, where the value of the hedging instrument does not exactly match the value of the asset being hedged. The other options provided do not accurately describe a naive hedge.

22-57 a Naive Hedge Occurs When