What is HEDGE RATIO?

A measure that indicates the price relationship between a reference ASSET and a proxy HEDGE contract. The hedge ratio, which is generally based on a statistical process such as linear regression, reflects how much of an asset or DERIVATIVE contract is needed to protect or offset the RISK of the UNDERLYING reference. It can be computed via: where Cov (A, B) is the COVARIANCE between asset A and hedge instrument B, and 2B is the VARIANCE of B. Also known as MINIMUM VARIANCE HEDGE RATIO.

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