Can the minimum variance hedge ratio be greater than 1?

Yes. Correlations max out at 1. However if the correlation is near 1 and the volatility of the spot is significantly larger than the volatility of the future the hedge ratio will be greater than 1.

What does a hedge ratio of 1 mean?

A hedge ratio of 1, or 100\%, means that the open position has been fully hedged. By contrast, a hedge ratio of 0, or 0\%, means that the open position hasn’t been hedged in any way.

What is the optimal hedge ratio?

In FX hedging with futures contracts, the optimal hedge ratio is the number of futures contracts required to hedge a given exposure. As an example, a Candadian farmer has signed a contract to sell 800,000 pounds of live cattle to a U.S. supermarket in three months’ time, at USD 1.65/pound.

What is hedging ratio?

The hedge ratio compares the value of a position protected through the use of a hedge with the size of the entire position itself. A hedge ratio may also be a comparison of the value of futures contracts purchased or sold to the value of the cash commodity being hedged.

Can optimal hedge ratio be more than 1?

Then the optimal hedge ratio is near 1. The closer ρ is to one, and the larger is the variance of the product you are hedging, the more you hedge. The larger is the variance of the product used to hedge the lower the hedge ratio. It is even possible that h would be greater than 1.

Can optimal hedge ratio negative?

The sign of hedging ratio shows the position in your portfolio. For instance, negative hedging ratio means that you should take a short position. Thank you all for your answers!

What is the delta hedge ratio?

Hedge ratio (delta) For options, ratio between the change in an option’s theoretical value and the change in price of the underlying stock at a given point in time.

Is hedge ratio beta?

Beta is the hedge ratio of an investment with respect to the stock market. Beta thus measures the contribution of an individual investment to the risk of the market portfolio that was not reduced by diversification.

How is hedge ratio calculated?

Hedge Ratio = Value of the Hedge Position/Value of the Total Exposure

1. Value of the Hedge Position = Total dollars which is invested by the investor in the hedged position.
2. Value of the total exposure = Total dollars, which is invested by the investor in the underlying asset.

Under what circumstances does a minimum variance hedge portfolio lead to no hedging at all?

Under what circumstances does a minimum-variance hedge portfolio lead to no hedging at all? A minimum variance hedge leads to no hedging when the coefficient of correlation between the futures price changes and changes in the price of the asset being hedged is zero.

What is a 0.5 call?

For example, if an at-the-money call option has a delta value of approximately 0.5—which means that there is a 50\% chance the option will end in the money and a 50\% chance it will end out of the money—then this delta tells us that it would take two at-the-money call options to hedge one short contract of the underlying …