### Basis risk (versus minimum variance hedge)

Basis risk is the variance of the basis, where basis is the difference between spot and futures price. Or, here I've just replaced future (F) with (hedge ratio * Future). The minimum variance hedge ratio (h*) is then the hedge ratio (the special case of the hedge ratio) that happens to minimize the basis risk; and we can find that by taking the first derivative of basis risk (with respect to the hedge ratio).Spreadsheet is available at our website.

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