On page 289, if the correlation between asset return and currency return is low and unstable, the hedge ratio should be 100%. On page 290, if the correlation between portfolio return and currency movement is lower, the hedge ratio should be lower. What is the relationship? Lowe correlation and higher hedge ratio OR lower correlation and lower hedge ratio?
correlation > 0 -> hedge ratio > 1 correlation = 0 -> hedge ratio = 1 correlation < 0 -> hedge ratio < 1 hedge ratio is inversely related to correlation.
If the asset and currency are negatively correlated you already have a hedge going. Therefore, your hedge ratio would drop.
If it’s zero, they move independently from each other. That means you need to fully hedge. Correlation is in fact a negative hedge. That means that if correlation is high, you need to hedge more. If correlation is negative, it is in fact a positive hedge and you need to hedge less. Hope this makes sense.