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Q-153.2. Using the same assumptions (i.e., spot price change volatility = 20%, futures price change volatility = 32%, correlation = 0.8), what is the minimum variance hedge ratio? | Financial Risk Manager Part 1 Quiz - LeetQuiz

Explanation:

The minimum variance hedge ratio is

h^* = \rho\frac{\sigma_S}{\sigma_F}

Substituting the values:

h^* = 0.80 \times \frac{0.20}{0.32} = 0.80 \times 0.625 = 0.50

So the minimum variance hedge ratio is 0.50.

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