ABSTRACT
Following the landmark article of Johnson (1960), a large body of literature concerning futures hedging has centred on the minimum-variance (MV) strategy. e objective of variance minimisation assumes a high degree of risk aversion, so the MV hedging strategy operates as agents are motivated to minimise asset value risks by choosing an optimal hedge ratio, i.e. the size of futures contracts used to cover a cash position. Under the expected-utility-maximisation paradigm and with the utility function solely approximated by the mean and the variance of asset returns, the MV optimal hedging ratio can be derived with the ensuing formula, which is easy to understand and concise to apply. is attractive property of the MV strategy has been responsible for its popularity in hedging studies.
