Tuesday, February 14, 2012

Cross Instrument optimal hedge ratio

When it comes to trading spreads, i.e. combinations of financial assets, it's pretty important to have a hedge ratio for lowest standard deviation of future portfolio returns. So here is the standard method.

* The example uses a futures contract to hedge against a spot/cash position.

Source: Wolfram Alpha: Calculator for Minimum Variance Hedge Ratio


Here's also a video example between jet fuel and oil futures by Bionic Turtle

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