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Regression Hedge

  • Least square regression analysis is performed with the help of historical relationship between real and nominal yields
  • Real yields are the independent variable and nominal yield is the dependent variable
  • This technique takes into consideration the change in the value of the real rate with change in value of nominal rate while calculating the face value of the hedge
  • Face Value of regression based hedge
    • Fr = - Fn x DV01n  / DV01r x β
  • β is estimated using regression analysis between dependent nominal rate and independent real rate
  • Regression can also be conducted with a two variable regression model

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