Unformatted text preview: t to the value of the asset in question. The change in the value of the hedger’s position between time t 1 and t 2 is ∇ S − h ∇ F. We may denote the variance of ∇ S by σ 2 S and the variance of ∇ F by σ 2 F . Then, the variance of the hedger’s position is ν = σ 2 S + h 2 σ 2 F − 2 hρσ S σ F , where ρ is the correlation between ∇ S and ∇ F and where, consequently, ρσ 2 S σ 2 F is the covariance of ∇ S and ∇ F . The value of h which minimises ν is h = ρ σ S σ F . 1...
View
Full Document
 Spring '12
 D.S.G.Pollock
 Forward contract, Spot price, σs, optimal hedge ratio

Click to edit the document details