Back to Browse

Basis risk (versus minimum variance hedge)

22.2K views
Aug 31, 2010
9:39

Basis risk is the variance of the basis, where basis is the difference between spot and futures price. Or, here I've just replaced future (F) with (hedge ratio * Future). The minimum variance hedge ratio (h*) is then the hedge ratio (the special case of the hedge ratio) that happens to minimize the basis risk; and we can find that by taking the first derivative of basis risk (with respect to the hedge ratio). Spreadsheet is available at our website.

Download

0 formats

No download links available.

Basis risk (versus minimum variance hedge) | NatokHD