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Answer: b) 64%
For a hedge that uses the minimum variance hedge ratio, hedge effectiveness is equal to the squared correlation between spot and futures price changes: \[ \text{Hedge effectiveness} = \rho^2 = 0.80^2 = 0.64 = 64\% \] Therefore, the correct answer is **64%**.
Author: Manit Arora
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Q-153.5. Assume the volatility (standard deviation) of the change in prices for the spot price of corn and the futures price, respectively, are 24% and 12%. The (coefficient of) correlation between changes in the two prices is 0.80. What is HEDGE EFFECTIVENESS (i.e., of the hedge that employs the minimum variance hedge ratio)?
A
a) 40%
B
b) 64%
C
c) 80%
D
d) 160%
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