A cross hedge often has greater risk then a perfect hedge because:
A) futures and cash interest rates are perfectly positively correlated.
B) futures and cash interest rates are perfectly negatively correlated.
C) cross hedging uses a contract based on the identical underlying asset.
D) futures and cash interest rates may not move together.
E) b. and d.

Question

A cross hedge often has greater risk then a perfect hedge because:
A) futures and cash interest rates are perfectly positively correlated. 
B) futures and cash interest rates are perfectly negatively correlated.
C) cross hedging uses a contract based on the identical underlying asset.
D) futures and cash interest rates may not move together.
E) b. and d.

Quizplus · Accepted Answer

Cross hedging involves using futures contracts based on a different underlying asset than the asset being hedged. Therefore, the futures price movement may not perfectly correlate with the cash price movement of the underlying asset. This can lead to greater risk compared to a perfect hedge where the futures and cash prices are perfectly positively or negatively correlated.

A Cross Hedge Often Has Greater Risk Then a Perfect