How is a hedge ratio commonly determined?
A)By discounting the optimal number of futures to sell per $1 of cash position using the yield involved.
B)By using the ratio of the most recent spot and futures price changes.
C)By running an ordinary least squares regression of changes in spot prices on changes in futures prices.
D)By using the conversion factor.

Question

Quizplus · Accepted Answer

A hedge ratio is commonly determined by running an ordinary least squares regression of changes in spot prices on changes in futures prices. This allows for the estimation of the slope coefficient, which represents the number of futures contracts required to hedge a given cash position. The hedge ratio is then the inverse of the slope coefficient.

How Is a Hedge Ratio Commonly Determined