In the context of futures contracts, it is a small adjustment that has to be made to the formula used to calculate the optimal number of contracts for hedging a position. This adjustment aims to take into account the impact of daily settlement of futures. Mathematically, the tailing adjustment is given by:

where N* is the number of futures required for the hedge, h* is the hedge ratio that minimizes the variance of the hedged position, V_A is the dollar value of the position being hedged, V_F is the dollar value of one futures contract. Per se, the optimal hedge ratio can be figured out using the following equation:

where h* is the hedge ratio, ρ is the coefficient of correlation between σ_S, the standard deviation of the underlying price, and σ_F the standard deviation of the futures price.