22-67 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.
E)By squaring the correlation between past changes in spot asset prices and futures prices.

Question

Quizplus · Accepted Answer

The hedge ratio is commonly determined by running an ordinary least squares regression of changes in spot prices on changes in futures prices. This approach calculates the slope coefficient of the regression as the hedge ratio, which represents the number of futures contracts needed to offset the risk in a cash position of a given size.

22-67 How Is a Hedge Ratio Commonly Determined