# 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
- σ
_{S}is the standard deviation of δS, the change in the spot price during the hedging period - σ
_{F}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

- σ