Hedge effectiveness is the extent to which a hedge transaction results in offsetting changes in fair value or cash flow that the transaction was intended to provide (as identified by the hedging entity).
See Also
Optimal Hedge Ratio CalculatorHedge AccountingWhat Is a Minimum Variance Portfolio?How to Calculate Hedge RatioThe hedge effectiveness equals the standard deviation futures price change squared times the minimum variance hedge ratio squared divided by the standard deviation spot price change squared.
Formula
| symbol | description | physical quantity |
|---|---|---|
| R2 | hedge effectiveness | "Unitless" |
| σF | standard deviation futures price change | "Money" |
| σS | standard deviation spot price change | "Money" |
| h* | minimum variance hedge ratio | "Unitless" |
