FuturesHedging.HedgeRatio Method 

Evaluates the Optimal Hedge ratio of a futures contract.

Parameters

correlation

The (Pearson) correlation coefficient between the spot price and the futures price which can be evaluated using PearsonCorrelation.

underlyingDeviation

The standard deviation of the underlying assets price which can be evaluated using StandardDeviation.

deviationFuture

The standard deviation of the futures price on the underlying asset which can be evaluated using StandardDeviation.

Return Value

The Optimal Hedge ratio of a futures contract.

Remarks

Optimal Hedge Ratio

The magnitude of the spot price changes of the underlying asset and the corresponding futures contract are generally different. When wishing to construct of successful hedging strategy over a given period is it vital that the ratio between these changes can be estimated as accurately as possible. The Optimal hedge ratio (R) is the ratio between the spot (S) and futures (F) price which minimized the variability between there prices. That is, the variance between S and R*F is minimized over the period considered.

See Also

FuturesHedging Class | Futures Namespace | PearsonCorrelation - In order to assist in the evaluation of the correlation between the spot price and futures price.