Someone please help me understand this stuff. LOS 46b.

I don’t really understand this stuff I only remember the min variance hedge ratio, which tells me how much of my principal I will hedge against (ie. hedging a little bit more than my principal) - sticky

^ or less. the minimum variance hedge ratio taken into account both the economic and transaction aspects of currency change. 1+ Cov(currency,foreign market)/variance of foreign market ( is this correct?)

you have variance of currency in the denominator the example they use is an exporter: if you are usd and buy stocks of a jpy exporter, you know exactly how much you have (and hedge, ie the principal), but you also know that if the jpy goes down the stock of the exporter is likely to go up (so the quantity of jpy to hedge changes) this minimum variance hege is just one way to approach that at least this is the theory, because I guess the price of the underlying will move for several reasons, not only changes in fx rates

CareerChange Wrote: ------------------------------------------------------- > ^ or less. the minimum variance hedge ratio taken > into account both the economic and transaction > aspects of currency change. > > 1+ Cov(currency,foreign market)/variance of > foreign market ( is this correct?) or 1 + slope of the graph (“my currency return” against “foreign currency return”) This looks easier for me to remember. - sticky