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∂σ 2Π
= 2σ ∆f
2
N f + 2Cov ∆S,∆f .
∂N f
Setting this equal to zero and solving for the minimum variance hedge ratio, N *f , gives
Cov ∆S,∆f
N *f = − 2
.
σ ∆f
(∂B/∂y B )
N *f = − .
(∂f/∂y f )
This value is approximated as
(∆B/∆y B )
N *f = −
(∆f/∆y f )
.
∆B ∆y f
= −
∆f ∆y B