Optimal contracts with minimum variance hedge ratio - 8 min screencast

by David Harper, CFA, FRM, CIPM

FRM | Market Risk | Quant |

If the futures contract moves in lockstep with the spot price of the asset being hedged, the hedge ratio is 1.0; e.g., to hedge 1 million gallons of jet fuel, we might take a long position in 24 heating oil futures contracts: 1 mm / 42,000 gallons per contract = about 24. But jet fuel is not heating oil, so we are cross-hedging. Here is the screencast:

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