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Answer: A stack and roll hedge takes a position in futures contracts with delivery dates (much) earlier than the expiration date of the hedge, then closes out these contracts and enters new short-term futures contracts
The **not accurate** statement is **C**. A **stack and roll hedge** uses futures contracts with a delivery date much earlier than the hedge horizon, and then the hedger **rolls forward into new futures contracts with later delivery dates** as expiration approaches. Statement C is incorrect because it says the hedger enters new **short-term** futures contracts, which is the opposite of the usual roll-forward process. Why the others are accurate: - **A**: If correlation is zero, the minimum variance hedge ratio is zero. - **B**: Tailing the hedge adjusts for futures daily settlement. - **D**: A beta-neutral position can be replicated more simply by investing in the risk-free asset, so fully neutralizing beta with futures is not necessarily advantageous.
Author: Manit Arora
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Question 711.2. Each of the following statements is true about hedging and cross-hedging with futures contracts EXCEPT, which is not accurate?
A
If the correlation coefficient is zero, the optimal number of contracts is zero
B
Tailing the hedge refers to adjusting the number of futures contracts used to hedge in order to reflect the impact daily settlement (by using the commodity position value rather than quantity of commodity position)
C
A stack and roll hedge takes a position in futures contracts with delivery dates (much) earlier than the expiration date of the hedge, then closes out these contracts and enters new short-term futures contracts
D
There is no theoretical reason or advantage for the owner of an equity portfolio to fully neutralize beta (i.e., to achieve net beta of zero) by hedging with S&P 500 futures contracts because she could have instead invested in the risk-free asset with less transaction cost
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