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What does the Concept of "Correlation" Refer to?

When hedging with futures you must check whether the futures contract and the cash position to be hedged are always moving in the same direction.

If the cash position falls, the future falls also. If the cash position increases, the future also increases.

If this is not the case, or only in part, the futures contract is not suitable for hedging purposes.

The degree of linear correlation between two variables (futures - cash position, share - equity index) can be measured statistically. The result of the survey is called the "correlation coefficient".

The correlation coefficient can range between -1 and +1.

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