Minimum Variance Hedge Ratio: Formula?

Is this right?

H = correlation (Rdc,Rfx) * [St. Dev (Rdc) / St. Dev (RFx)]

H = Cov (Rdc, Rfx) / Var(Rfx)

I feel like i’m picking out the bones of a fish trying to get this formula straight. Couldn’t they just have labled (with clarity) what the variables are on page 63…

If this formula comes in the exam, I am putting my points on the table. If I try to remember this, I will forget 5 other simple formulas.

It’s not a difficult formula. Minimum or Optimal hedge ratio= Correlation (RDC; RFX) ×[Standard Deviation (RDC )/Standard Deviation (RFX)]

I believe this would be correct, now.

You all already know this formula from level 1 and 2!

It’s only a beta coefficient of a regression; e.g., like the beta of our lovely CAPM. So, do not make it more complicated than it is. :slight_smile:

I think so, too.

I thought it was… 1 + (Cov Rdc.Rfc / Var (Rfx)

What reading is this formula from, i have never seen it?

I’ve never seen this, too.

Oh me too never heard of it. I remember in economic reading RISK PREMIUM under singer and terhaar = p * std * market sharp ratio. Beta = covar / market var. covar = p * sdt I * std j.

It’s buried in the currency management section - page 63. I was more or less trying to confirm Rfx or Rdc was on the denominator, wasn’t very clear in the text

Thanks for fixing the denominator on my second formula What you look…- tired eyes

  • I was thinking the same thing, looks very similar to formula for Beta