A measure that indicates the price relationship between a reference ASSET and a proxy HEDGE contract. The hedge ratio , which is generally based on a statistical process such as linear regression , reflects how much of an asset or DERIVATIVE contract is needed to protect or offset the RISK of the UNDERLYING reference. It can be computed via: where Cov (A, B) is the COVARIANCE between asset A and hedge instrument B, and 2B is the VARIANCE of B. Also known as MINIMUM VARIANCE HEDGE RATIO.
Black’s Law Online Dictionary
