If the minimum-variance hedge ratio is -1, then which of the following statements is true? (a)...

If the minimum-variance hedge ratio is -1, then which of the following statements is true?

		(a) Changes in spot and futures prices are perfectly negatively correlated.
		(b) The standard deviations of spot and futures price changes are the same.
		(c) The minimum-variance hedge for a long spot exposure is a short futures exposure of the same size.
		(d) All of the above.

Expert Solution

Let explore every option one by one

A) Changes in spot and futures prices are perfectly negatively correlated.

Formula for minimum variance hedge ratio = correlation between spot and future prices * standard deviation of spot / standard deviation of futures = -1

As standard deviation cannot be negative, correlation between spot and futures comes to be negative. The ratio can come out to be -1 only if standard deviation of both spot and futures is equal and correlation between the prices is -1.

So, statement A is true.

B) The standard deviations of spot and futures price changes are the same.

As explained in A part, statement B is true.

C) The minimum-variance hedge for a long spot exposure is a short futures exposure of the same size.

Correlation between prices of spot and futures is perfectly negatively correlated. It means 1% increase in spot price would lead to 1% decrease in futures. It means that, if we long (buy) spot , it is equivalent to shorting ( sell) future, for same quantity, The results would be same as perfect negative correlation exists.

Hence statement C is also true.

Correct answer - Statement D

jeff jeffy answered 1 year ago

Illustrate the notion of “minimum variance hedge ratio” by means of a numerical example

1 Which of the following statements is NOT true? a. GDP deflator is the ratio of...

1 Which of the following statements is NOT true? a. GDP deflator is the ratio of real GDP to nominal GDP b. A GDP deflator greater than 1 indicates inflation c. A GDP deflator greater than 1 indicates that nominal GDP exceeds real GDP 2 Which of the following is the best description of the LM curve? a. The value of production using prices of the current year b. The relationship between real output (GDP) demanded and the price level,...

Which of the following statements is TRUE? Utilization of a resource is at its minimum...

Which of the following statements is TRUE? Utilization of a resource is at its minimum when the flow rate is equal to its capacity. Utilization of a resource is at its maximum when the flow rate exceeds its capacity. Utilization of a resource is at its maximum when the flow rate is equal to its capacity. Utilization of a resource is at its minimum when the flow rate exceeds its capacity.

Which of the following statements are true with respect to the P/E Ratio?

Ratios: Current Ratio: 3.6093 Quick Ratio: 2.1799 Times Interest Earned: 9.9143 ROE 16.48% ROA 12.01% Equity Multiplier 1.3714 Inventory Turnover 1.3489 The P/E (Price/Earnings) Ratio is defined as: P/E ratio = Price per Common Share / Net Income per Common Share. Which of the following statements are true with respect to the P/E Ratio? Select one: a. A P/E Ratio of 15 would tell us that each Common Stock is selling for 15 times the Net Income per common share...

Which of the following statements is true about the debt ratio? a. The higher the debt...

Which of the following statements is true about the debt ratio? a. The higher the debt ratio, the less risk a company is taking in managing its operations. b. The debt ratio measures the percent of the company's debt that is financed by its assets. c. The use of the debt ratio decreases the financial leverage of a company. d. The debt ratio is useful in assessing the solvency and future earning potential of a company.

Which of the following statements about the total debt to total assets ratio is NOT true?...

Which of the following statements about the total debt to total assets ratio is NOT true? The debt ratio is calculated by dividing a company's total liability by its total assets. "The higher the total debt to total asset ratio, the greater the financial risk." "If a company's debt to asset ratio is less than 0.5, most of its assets are financed through debt." A highly leveraged company could be in danger if its creditors demand repayment.

11) Which of the following statements is true about the debt toequity ratio?The greater...

11) Which of the following statements is true about the debt to equity ratio?The greater the debt to equity ratio the smaller the opportunity to increase the return on equity of a firm through financial leverage.The lower the debt to equity ratio the higher the risk that financial leverage will have a negative impact on a firm's return on equity.The size of a of a company's debt to equity ratio is directly related to amount of a firm's sales.The greater...

What is the Sharpe ratio for the minimum variance portfolio (MVP)?

A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a sure rate of 5%. The probability distributions of the risky funds are:Expected ReturnStandard DeviationStock fund (S)15%32%Bond fund (B)923The correlation between the fund returns is 0.10.What is the Sharpe ratio for the minimum variance portfolio (MVP)?

Which of the following are true of ratio analysis?

Which of the following are true of ratio analysis?a.Ratios standardize numbers and facilitate comparison.b.Ratios are used to highlight strengths and weaknesses.c.Ratios comparisons should be made through time and with competitors.d.All of the above.e.None of the above.

Identify which of the following statements is true and which is false. 1) _________ For a...

Identify which of the following statements is true and which is false. 1) _________ For a set of numerical data, if the mean is larger than the median, this is evidence of right-skew. 2) _________ Negative values of the standard deviation indicate that the set of values is even less dispersed than would be expected by chance alone. 3) _________ For a set of numerical data, if the mean and the median are of equal value, this is evidence of...

Question