Minimum-Variance Hedge Ratio and Basis Risk

Calculating the minimum-variance hedge only applies for:

That's right! Minimum-variance hedging is a great strategy for cross hedges, which are indirect hedges because they use other currencies or assets to hedge currency risk. So cross hedges are a perfect candidate to use the minimum-variance hedging strategy to improve the hedge ratio.

No. Direct hedges will have such a high correlation between the foreign-currency asset and the hedge that there's no need for a minimum-variance hedge.

Not quite. Forward contracts have a high correlation between the currency risk and the hedge ratio, so there's no need to use minimum-variance hedging.

cross hedges.

direct hedges.

forward contracts.