22-84 Which of the following is NOT true regarding hedge ratio?
A)When there is no basis risk hedge ratio is equal to one.
B)When h=1,both spot and futures are expected to change together by the same absolute amount.
C)When h=1,FX risk of the cash position should be hedged dollar for dollar by buying FX futures.
D)When basis risk is present,the spot and future exchange rates are expected to move imperfectly together.
E)The FI must sell a greater number of futures when there is basis risk than it has to when basis risk is absent.

Question

Quizplus · Accepted Answer

When h=1, the total exposure to FX risk should be hedged dollar for dollar by buying FX futures, not just the cash position. The hedge ratio will differ from one when there is basis risk present, and the FI may need to sell a greater number of futures to fully hedge its exposure. When there is no basis risk, the hedge ratio will be equal to one and both spot and futures are expected to move together by the same absolute amount. When basis risk is present, the spot and future exchange rates are expected to move imperfectly together.

22-84 Which of the Following Is NOT True Regarding Hedge