Hedge Ratio Calculator

✖Hedge Value is the amount of risk exposure that is offset or protected by implementing a hedge using financial instruments such as futures contracts.ⓘ Hedge Value [HV]			+10% -10%
✖Total Position Value refers to the aggregate worth of all assets, securities, or contracts held by an individual or entity.ⓘ Total Position Value [TPV]			+10% -10%

✖Hedge Ratio represents the proportion of futures contracts needed to offset risk exposure in a corresponding cash market position, minimizing potential losses from price fluctuations.ⓘ Hedge Ratio [Δ]

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Formula

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Hedge Ratio

Formula

`"Δ" = "HV"/"TPV"`

Example

`"0.65"="6500"/"10000"`

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Hedge Ratio Solution

STEP 0: Pre-Calculation Summary

Formula Used

Hedge Ratio = Hedge Value/Total Position Value
Δ = HV/TPV
This formula uses 3 Variables

Variables Used

Hedge Ratio - Hedge Ratio represents the proportion of futures contracts needed to offset risk exposure in a corresponding cash market position, minimizing potential losses from price fluctuations.
Hedge Value - Hedge Value is the amount of risk exposure that is offset or protected by implementing a hedge using financial instruments such as futures contracts.
Total Position Value - Total Position Value refers to the aggregate worth of all assets, securities, or contracts held by an individual or entity.

STEP 1: Convert Input(s) to Base Unit

Hedge Value: 6500 --> No Conversion Required
Total Position Value: 10000 --> No Conversion Required

STEP 2: Evaluate Formula

Substituting Input Values in Formula

Δ = HV/TPV --> 6500/10000

Evaluating ... ...

Δ = 0.65

STEP 3: Convert Result to Output's Unit

0.65 --> No Conversion Required

FINAL ANSWER

0.65 <-- Hedge Ratio

(Calculation completed in 00.004 seconds)

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Created by Keerthika Bathula

Indian Institute of Technology, Indian School of mines, Dhanbad (IIT ISM Dhanbad), Dhanbad

Keerthika Bathula has created this Calculator and 50+ more calculators!

Verified by Nayana Phulphagar

Institute of Chartered and Financial Analysts of India National college (ICFAI National College), HUBLI

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< 20 International Finance Calculators

FRA Payoff ( Long Position )

Go FRA Payoff = Notional Principal*(((Underlying Rate at Expiration-Forward Contract Rate)*(Number of Days in Underlying Rate/360))/(1+(Underlying Rate at Expiration*(Number of Days in Underlying Rate/360))))

Put-Call Parity

Go Call Option Price = Spot Price of Underlying Asset+Put Option Price-((Strike Price)/((1+(Risk-Free Rate of Return/100))^(No. of Months/12)))

Optimal Hedge Ratio

Go Optimal Hedge Ratio = (Standard Deviation of Changes in Spot Price/Standard Deviation of Changes in Futures Price)*Correlation of Changes in Spot and Futures Prices

Option Premium

Go Option Premium = ((Share Option Warrant/Number of Securities Per Option Warrant)+(Purchase Price*100/Price Security-100))

Balance of Financial Account

Go Balance of Financial Account = Net Direct Investment+Net Portfolio Investment+Asset Funding+Errors and Omissions

Annualised Forward Premium

Go Annualised Forward Premium = (((Forward Rate-Spot Rate)/Spot Rate)*(360/No. of Days))*100

Balance of Capital Account

Go Balance of Capital Account = Surpluses or Deficits of Net Non-Produced+Non-Financial Assets+Net Capital Transfers

Current Account Balance

Go Current Account Balance = Exports-Imports+Net Income Abroad+Net Current Transfers

Uncovered Interest Rate Parity

Go Expected Future Spot Rate = Current Spot Exchange Rate*((1+Domestic Interest Rate)/(1+Foreign Interest Rate))

Covered Interest Rate Parity

Go Forward Exchange Rate = (Current Spot Exchange Rate)*((1+Foreign Interest Rate)/(1+Domestic Interest Rate))

International Fisher Effect using Interest Rates

Go Change in Exchange Rate = ((Domestic Interest Rate-Foreign Interest Rate)/(1+Foreign Interest Rate))

Optimal Number of Contracts

Go Optimal Number of Contracts = (Optimal Hedge Ratio*Number of Positions Hedged)/Futures Contract Size

Relative Strength Index

Go Relative Strength Index = 100-(100/(1+(Average Gain during Up Period/Average Loss during Down Period)))

Bid Ask Spread

Go Bid Ask Spread = ((Ask Price-Bid Price)/Ask Price)*100

International Fischer Effect using Spot Rates

Go Change in Exchange Rate = (Current Spot Exchange Rate/Spot Rate in Future)-1

Vega (Options Greek)

Go Vega = Change in Option Premium/Change in Volatility of Underlying Asset

Theta

Go Theta = -Change in Option Premium/Change in Time to Maturity

Gamma

Go Gamma = Change in Delta/Change in Price of Underlying Asset

Rho (Options Greek)

Go Rho = Change in Option Premium/Change in Rate of Interest

Hedge Ratio

Go Hedge Ratio = Hedge Value/Total Position Value

Hedge Ratio Formula

Hedge Ratio = Hedge Value/Total Position Value
Δ = HV/TPV

What is Hedge Ratio ?

The hedge ratio is a crucial concept in risk management, particularly in the context of derivatives trading like futures contracts. It represents the relationship between the size of a position in the underlying asset and the size of the corresponding position in the derivative contract used to hedge that asset. A hedge ratio is calculated to minimize risk by offsetting potential losses or gains in one position with opposite movements in the other. For example, if an investor holds a certain quantity of stocks, they might use futures contracts as a hedge. The hedge ratio determines how many futures contracts are needed to effectively protect against adverse price movements in the stocks. A higher hedge ratio implies a stronger hedge, while a lower ratio indicates a less effective hedge. Finding the appropriate hedge ratio involves considering factors such as the correlation between the asset and the derivative, the investor's risk tolerance, and market conditions.

How to Calculate Hedge Ratio?

Hedge Ratio calculator uses Hedge Ratio = Hedge Value/Total Position Value to calculate the Hedge Ratio, The Hedge Ratio is the amount of risk exposure that is offset or protected by implementing a hedge using financial instruments such as futures contracts. Hedge Ratio is denoted by Δ symbol.

How to calculate Hedge Ratio using this online calculator? To use this online calculator for Hedge Ratio, enter Hedge Value (HV) & Total Position Value (TPV) and hit the calculate button. Here is how the Hedge Ratio calculation can be explained with given input values -> 0.65 = 6500/10000.

FAQ

What is Hedge Ratio?

The Hedge Ratio is the amount of risk exposure that is offset or protected by implementing a hedge using financial instruments such as futures contracts and is represented as Δ = HV/TPV or Hedge Ratio = Hedge Value/Total Position Value. Hedge Value is the amount of risk exposure that is offset or protected by implementing a hedge using financial instruments such as futures contracts & Total Position Value refers to the aggregate worth of all assets, securities, or contracts held by an individual or entity.

How to calculate Hedge Ratio?

The Hedge Ratio is the amount of risk exposure that is offset or protected by implementing a hedge using financial instruments such as futures contracts is calculated using Hedge Ratio = Hedge Value/Total Position Value. To calculate Hedge Ratio, you need Hedge Value (HV) & Total Position Value (TPV). With our tool, you need to enter the respective value for Hedge Value & Total Position Value and hit the calculate button. You can also select the units (if any) for Input(s) and the Output as well.

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