what are the two components of minimum-variance hedge ratio
duration convexity
nope, it should be translation risk and economic risk
Correct…MIN VAR HEDGE RATIO = 1 + Cov / var
1 : stands for TRANSLATION RISK (it refers to the conversion of foreign assets into the domestic currencY)
Cov / var : stands for the ECONOMIC RISK (it refers to the fact that international fx can make a product more or less competitive even though it is not sold abroad but e.g. tourists could still come and buy it)
MIN VAR HEDGE RATIO does minimise the Ordinary least Squares (OLS)…i.e. minimise the sum of the errors against the linear regression
It’s useful for understanding the effectiveness of the indirect hedges (e.g. proxy hedge)
I have seen this somewhere in the curriculum but have absolutely no idea what the **** it is. In fact, this is happening to me very often with Level III - it is as if the concepts are so fuzzy and qualitative that retention is doubly hard.
Is this normal?
I feel you man…I’ve read the curriculum cover to cover and can’t remember this interpretation of a minimum hedge ratio at all…
Ive just always known it to be the slightly transformed version of:
h* = correlation(a,b) x Stdv(a) / Stdv(b)
Well, even that sounds completely alien to me 
Haha yeah I mainly remember it from my FRM exam in November.
This is nothing more than the beta of a with respect to b.
Seems pretty straightforward.
No I totally agree this version is straightforward…I mean I can’t remember an interpretation that involves the notion of economic risk and translation risk as mentioned above.
bumping this thread…
can’t get this. if mvhr is 1+ cov/var and cov is correllation std1*std2
then how is mvhr correlation*std1 / std 2? shouldn’t it be correllation *std1/variance 2?