Question: Consider a cross hedge, for example using heating oil futures to cross hedge the price risk of jet oil. Suppose the measure of hedge effectiveness

Consider a cross hedge, for example using heating oil futures to cross hedge the price risk of jet oil. Suppose the measure of hedge effectiveness is 0.7. Which of the following is true?

A. It means that the optional amount of futures should be 70% of the underlying assets to be hedged

B. It means that the uncertainty in the value of the hedged portfolio is 70% lower than the uncertainty in the unhedged portfolio

C. It means that the uncertainty in the value of the unhedged portfolio is 30 % lower than the uncertainty in the unhedged portfolio

D. It means that the uncertainty in the value of the hedged portfolio is 30% lower than the uncertainty in the unhedged portfolio

E. It means that the uncertainty in the value of the unhedged portfolio is 70% lower than the uncertainty in the unhedged portfolio

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