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.