In hedging, the most important variable is the hedge ratio. is is dened as the ratio of the size of the
exposure to the size of the position taken in the futures contract. In order to minimize risk, the appropri-
ate hedge ratio needs to be determined.
e size of exposure is calculated as:
Size of exposure = Quantity of assets exposed × Spot price of the asset exposed
e size of position taken in futures is calculated as:
Size of position in futures = Contract size × Number of futures contracts
e hedge ratio is usually termed as the minimum variance hedge ratio and is calculated as shown ...
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