Minimum-variance hedge ratio (MVHR):
A regression of the past changes in value of the portfolio to the past changes in value of the hedging instrument. The hedge ratio is the beta.
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Example 10: Determining and applying the MVHR
Rdc = 0.12 + 1.25 (% change of spot price USD/EUR)
A U.S. -based portfolio is long Eur 2,000,000 of exposure.
Calculate the size of and state the currency hedge to minimize expected volatility of the Rdc
Answer:
Eur 2,000,000 x 1.25 = 2,500,000 . The manager will short Eur 2,500,000 to hedge a long Eur 2,000,000 exposure in the portfolio.
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why is 1.25 multiplying to Eur 2,000,000?
hedge ratio beta is slope coefficient: past changes in value of the portfolio /past changes in value of the hedging instrument
the answer should be: 2,000,000 /1.25 = 1,600,000 ?
Can anyone help me?
Appreciated
