MediumPortfolio & Risk
Minimum-Variance Hedge Ratio
Goldman SachsPIMCO
You hold a spot position with volatility 30% and hedge with a futures contract with volatility 20%; the correlation between spot and futures returns is 0.6. What is the minimum-variance hedge ratio (futures notional per unit of spot)?
Approach
Minimise Var(S − hF) in h.
The optimum is the regression beta of S on F.
Answer
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The answer is 0.9. Sign in free for the full worked solution and to check your own answer.
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