Hi all, can any one found instances where in the "optimal hedge variance ratio" is used in real practice while making hedge decisions (in commodities), like in corporations. may be people doing hedging or with live experience can help me in this regard.

HiI´ll give my opinion based on what I´ve already read and calculated once for a corn hedging. Optimal Variance Hedge Ratios depend on correlation, which is very unstable. I´m very afraid of hedging by correlation. try to things to get a better idea of this matter:a. Build a portfolio with the undelying asset and its hedge. Calculate the hedge ratio, find the quantity of the hedge, establish a period for hedge rebalancing and calculate the P&L for a large date range. Probably you´ll find large swings in the P&L despite of being "hedged".b. Read this paper from BIS (the first which came to my mind...). Look for a section called Hedging Risk“A Review of Financial Market Events in Autumn 1998, Committee on the Global Financial System, October, 1999, BIS” Best regards

Hi Mr. Bob, thank you for the opinion. I agree with you that correlation instability will significantly alter hedge outcome based on hedge variance ratio. I am going in two steps. First, rebalance the hedge ratio every week for what ever the time period of hedge (in this way i can even accomodate changing physical exposure of corporate in a dynamic way). next, trying to construct the forward looking hedge ratios using bivariate GARCH volatility and covariance forecasts. though i could find literature on this, just trying to check any corporate would be interested in this. or wanted to know any succesful attempts on correlation forecasting (atleast partial success ignoring the extreme failures.). also, recently i came across that copulas can be used to model non-linear association, similarly spline regression. people any body working on this, already, request to share the opinion, rgds..