Financial Risk Manager Part 2

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Explanation:

The hedge ratio (β) is calculated using the formula:

\beta = \frac{\text{Cov}(Y_h, Y_p)}{\text{Var}(Y_h)}

First, calculate Cov(Yₕ, Yₚ) using the formula:

\text{Cov}(Y_h, Y_p) = \rho(Y_h, Y_p) \cdot \sigma(Y_h) \cdot \sigma(Y_p)

Substituting the given values:

\text{Cov}(Y_h, Y_p) = 0.6 \cdot 0.05 \cdot 0.08 = 0.0024

Now substitute into the hedge ratio formula:

\beta = \frac{0.0024}{0.0025} = 0.96

Explanation:

The hedge ratio (β) is calculated using the formula:

\beta = \frac{\text{Cov}(Y_h, Y_p)}{\text{Var}(Y_h)}

First, calculate Cov(Yₕ, Yₚ) using the formula:

\text{Cov}(Y_h, Y_p) = \rho(Y_h, Y_p) \cdot \sigma(Y_h) \cdot \sigma(Y_p)

Substituting the given values:

\text{Cov}(Y_h, Y_p) = 0.6 \cdot 0.05 \cdot 0.08 = 0.0024

Now substitute into the hedge ratio formula:

\beta = \frac{0.0024}{0.0025} = 0.96

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Last updated: July 5, 2026 at 07:18

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