An optimal hedge ratio is one in which the change in the futures price equals the change in the spot price.

Question

Quizplus · Accepted Answer

An optimal hedge ratio is the ratio of futures contracts to be sold or bought to offset the risk in the spot market. The purpose of a hedge is to minimize the potential loss resulting from adverse movements in the spot price by taking an opposing position in the futures market. Therefore, an optimal hedge ratio should result in a perfect offsetting of price changes between the spot and futures markets. This means that the change in the futures price equals the change in the spot price, making the hedge ratio optimal.

An Optimal Hedge Ratio Is One in Which the Change