Hi all,
I have trouble understanding the example 10 in Schweser on how the MVHR works. MVHR is a mathematical approach to determine hedge ratio by regessiong the value of the portfolio in domestic currency to the changes in the value of the hedging instrument.
In the example US based wants to hedge long 2000 EUR exposure. His approach is decribed as calculating the w eekly percentage changes in value of EUR against USD and unhedged percentage changes in chalue of the portfolio in domestic currency, then performing least squares regression analysis leading to
RDC = 0.12 + 1.25 %Delta SUSD/EUR
The Beta is used as MVhR leading the manager to shorting 1.25 EUR per EUR exposure.
My question: Why is is the spot rate used here? It is really a hedging instrument? In a corresponding topic test regression is against the forward rate which should lead to other results, shouldn’t it? And would be more suitable as a hedging instrument.
Or is the manager simply directly going short the EUR without the use of forwards? Now that I think of it, this could maybe also be an option and would fit to the description here? But this is never listed as a valid hedging approach…
Thanks for clarifing!