How Is the “Hedge Ratio” Calculated to Minimize Basis Risk?
The optimal hedge ratio is typically calculated using a statistical method, such as a regression analysis, to determine the historical relationship (beta) between the spot price of the asset being hedged and the price of the futures contract. The goal is to find the ratio of futures contracts to the spot exposure that minimizes the variance of the combined hedged position, thus minimizing basis risk.
Glossar
Hedge Ratio
Calculation ⎊ The Hedge Ratio quantifies the necessary size of a derivative position required to offset the price risk inherent in an underlying asset or portfolio, representing the change in the derivative's price relative to the change in the underlying.
Optimal Hedge Ratio
Calibration ⎊ The optimal hedge ratio, within cryptocurrency derivatives, represents a dynamically adjusted weighting applied to an offsetting position to minimize the impact of price fluctuations in the underlying asset.