22-85 What does R2 =0 indicate?
A)Changes in the spot rate and changes in the futures price are perfectly correlated.
B)All observations between changes in spot rate and changes in futures price lie on a straight line.
C)The spot and future exchange rates are expected to move imperfectly together.
D)The FI must sell a greater number of futures to hedge the cash position.
E)There is no statistical association between changes in spot rates and changes in futures price.

Question

Quizplus · Accepted Answer

R2 =0 indicates that there is no statistical association between changes in spot rates and changes in futures price. This means that changes in the spot rate cannot be used to predict changes in the futures price and vice versa. It also means that hedging using futures contracts may not be effective in reducing risk associated with changes in spot rates.

22-85 What Does R2 =0 Indicate