Explanation

When hedging with futures, the R² (coefficient of determination) from the regression analysis is the key metric for determining which asset will introduce the least basis risk.

Key Points:

• R² measures the proportion of variance in the dependent variable (Zirconium price changes) that is explained by the independent variable (asset price changes)
• Higher R² values indicate stronger correlation and better hedging effectiveness
• Lower basis risk occurs when the hedging instrument closely tracks the price movements of the asset being hedged

Analysis of Options:

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

Conclusion: Asset B has the highest R² value (0.81), meaning it explains 81% of the variance in Zirconium price changes. This indicates the strongest correlation and would introduce the least basis risk when used for hedging.