Optimal Hedge Ratio Calculator
The Optimal Hedge Ratio Calculator (minimum-variance hedge) finds the hedge that minimises risk using the correlation and volatilities of the spot and futures prices. Enter correlation and the two standard deviations.
Formula
Optimal Hedge Ratio = Correlation × (Spot Volatility ÷ Futures Volatility)
- This minimises the variance of the hedged position.
- Multiply by the position size to get the number of futures contracts to use.
Correlation 0.9, spot vol 12%, futures vol 15%
Inputs
- Correlation (spot vs futures): 0.9
- Spot Price Std Deviation: 12 %
- Futures Price Std Deviation: 15 %
0.9 × (12 ÷ 15) = 0.72, the variance-minimising hedge ratio.
Frequently asked questions
What is the minimum-variance hedge ratio?
It is the hedge ratio that minimises the total variance (risk) of the combined spot-plus-futures position.