Question

To minimize the basis risk, a company using the futures market to hedge the price risk should use a hedge ratio as close to 1 as possible.

T or F?

Answer 1

A hedge ratio is the ratio of exposure to a hedging instrument to the value of the hedged asset. A ratio of 1 or 100% means that the position is fully hedged and a ratio of 0 means it is not hedged at all.

Hedge ratio is an important statistic in risk management because it tells us the extent to which the risk of any adverse movement in our asset or liability will be met by any offsetting movement in the hedging instrument. As you will see in the example below, the hedge ratio changes due to changes in value of the hedging instrument and/or the hedged asset or liability.

So based on detail i given i can say above given statement is TRUE.....