Derivation of Optimal Hedge Ratio Formula

Hi everyone,

I came across this formula for Calculating the Optimal Hedge Ratio

HR = F.P/S.P = p x (sigma s.p)/ (sigma f.p)

p = correlation between future price and the spot price.

How do you derive this formula ? Is it simple ? Or am i just expected to mug the formula and move on,

Thanks ! :slight_smile:

This is nothing more than the slope of the regression line with futures price on the horizontal axis and spot price on the vertical axis; it’s the same as beta.