Question
You are a beverage corporation that uses aluminum cans as an input to production. You are considering using raw aluminum futures contracts to hedge the
You are a beverage corporation that uses aluminum cans as an input to production. You are considering using raw aluminum futures contracts to hedge the price of aluminum cans in one month. You run a regression of the change in aluminum can price on the change in raw aluminum price. The R-squared from the regression is 60%, and the beta is 0.5. As an alternative to using raw aluminum futures, you are also considering using silver futures contracts to hedge the price of aluminum cans in one month. You run a regression of the change in aluminum can price on the change in silver price. The R-squared from the regression is 27%, and the beta is 2.0. Which of the following is true about the effectiveness of raw aluminum futures and silver futures to hedge the price of aluminum cans.
Group of answer choices
A. Raw aluminum futures is more effective, as indicated by a higher R-squared.
B. Both raw aluminum and silver futures are completely ineffective at hedging.
C. Silver futures are more effective, as indicated by a higher beta.
D. Both raw aluminum and silver futures are perfectly effective at hedging.
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