Optimal Hedge Ratio Calculator
FinanceCalculate the optimal hedge ratio using the correlation between spot and futures prices along with their relative volatility.
Optimal Hedge Ratio
Correlation multiplied by the ratio of spot to futures price volatility
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Odeh Ahwal0people find this calculator helpful
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Frequently Asked Questions
What does an optimal hedge ratio of 1 mean?
A hedge ratio of 1 means a fully offsetting one-to-one hedge, using an equal notional amount of the futures contract as the underlying exposure.
Why is correlation important in this formula?
Correlation measures how closely spot and futures prices move together. Lower correlation reduces the effectiveness of the hedge, which the formula reflects by lowering the optimal hedge ratio.
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