On page 297 it says that “if basis is zero” Rh = R + s (1 - h) and Min Var Hedge Ratio H*= 1 + Cov (R,s)/ Var of s Is the above true ONLY when the basis is zero? In other words we can’t use Min Var Hedge Ratio if the basis is not zero??
Yes, basis has to be zero. If not the futures return will not equal currency return and the minimum variance hedge ratio will not be convertible from futures return to spot return.