Testing a Hedge

Overview


Sort Cut Method


Critical Terms Match


Dollar Offset Method


The dollar offset method measures the cumulative changes in the values of the hedged instrument and its matching derivative.
{% \delta = \Delta D / \Delta H %}
where

  • {% \Delta D %} is the cumulative change of hedge instrument
  • {% \Delta H %} is the cumulative change of the hedged instrument
Although the specification does not specify a hard number for the dollar offset test, it is generally accepted that {% \delta %} should be between 0.8 and 1.25.