22-68 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.
E)When the spot and future exchange rates are expected to move perfectly together.

Question

Quizplus · Accepted Answer

When spot rate changes are greater than futures rate changes, the estimated hedge ratio will be greater than one. This is because the futures contract will not perfectly offset the price movements in the spot market, so a higher ratio is needed to provide adequate hedging.

22-68 When Will the Estimated Hedge Ratio Be Greater Than