Loading....
Coupon Accepted Successfully!

 

Choice of contracts

  • Choose a delivery month that is as close as possible to, but later than the end of the life of the hedge because:
    • The futures prices are quite volatile during the delivery month
  • When there is no futures contract on the asset being hedged, choose the contract whose futures price is most highly correlated with the asset price
  • In such cases the proportion of the exposure that should optimally be cross hedged
    • Optimal Hedge Ratio:  
  • Where
    • σS is the standard deviation of δS, the change in the spot price during the hedging period
    • σF is the standard deviation of δF, the change in the futures price during the hedging period
    • ρ is the coefficient of correlation between δS and δF





Test Your Skills Now!
Take a Quiz now
Reviewer Name