Explanation

When hedging using futures on a correlated asset (cross-hedging), the R² value from the regression analysis indicates the proportion of variance in the spot price that is explained by the futures price. A higher R² means less basis risk.

Analysis of R² values:

• Asset A: R² = 0.62 (62% variance explained)
• Asset B: R² = 0.81 (81% variance explained) ← Highest R²
• Asset C: R² = 0.35 (35% variance explained)
• Asset D: R² = 0.45 (45% variance explained)

Key Points:

• Asset B has the highest R² (0.81), meaning it explains 81% of the variance in Zirconium price changes
• This indicates the strongest relationship between Asset B and Zirconium
• Higher R² = less basis risk in the hedging position
• The α and β coefficients are less important than R² for minimizing basis risk

Therefore, futures on Asset B would introduce the least basis risk.