This paper proposes that, and explains why, hedge profits and regression approach hedge ratios should be calculated using cost-of-carry-adjusted price changes. This Modified Regression Method for determining hedge ratios is denoted MRM. The paper discusses the Error-Correction Model for hedge...

This study explains why a modified regression method, which calculates hedge profits and hedge ratios using cost-of-carry-adjusted price changes, provides greater accuracy than the unadjusted regression method. It shows that the modified regression method and the error-correction model lead to...