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Re: st: optimal hedge variance ratio


From   smerryman@kc.rr.com
To   statalist@hsphsun2.harvard.edu
Subject   Re: st: optimal hedge variance ratio
Date   Wed, 17 Aug 2005 13:12:37 -0500

I believe one form of the optimal hedge ratio is 

h = cov(delta_S, delta_F)/var(delta_F)

which is the same as coefficient from regressing delta_S on delta_F.

Scott


----- Original Message -----
From: Krishna <snvk4u@gmail.com>
Date: Wednesday, August 17, 2005 10:28 am
Subject: st: optimal hedge variance ratio

> Hi All,
> 
> I am trying to finding out what could be an optimal hedge variance
> ratio between spot and futures markets, between whose the degree of
> correlation is highly varying.
> 
> For some reasons the hedge time period cannot extend for more than 1
> month. So just to get an hint, I have calculated monthly correlation
> coefficients which are highly varying. I am copying the frequency
> distribution of monthly correlation coefficient values
> (karl-pearsons') to indicating the degree of volatility.
> 
> Corre
> range   Frequency
> -0.7    0       0.00%
> -0.5    2       3.08%
> -0.3    3       4.62%
> 0       7       10.77%
> 0.3     7       10.77%
> 0.5     6       9.23%
> 0.7     16      24.62%
> 0.9     15      23.08%
> 1       9       13.85%
> 
> Can someone throw light on which model to use and how to approach for
> desiging a hedge model (estimate hedge variance ratio) in such a
> scenario. Help requested at the earliest.
> 
> thanks for the attention and best rgds
> 
> snvk
> 
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