Hedge Ratio Calculator
Calculate the optimal hedge ratio for your investment portfolio to minimize risk
Portfolio Information
Hedge Instrument
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Understanding Hedge Ratios
The hedge ratio determines how much of your portfolio should be hedged to minimize risk. Key concepts:
What is a Hedge Ratio?
The proportion of an investment position that should be hedged to eliminate price risk. Calculated using the portfolio beta and instrument characteristics.
Portfolio Beta
Measures your portfolio’s sensitivity to market movements. A beta of 1.2 means your portfolio typically moves 20% more than the market.
Hedge Effectiveness
The percentage of risk eliminated by the hedge. Perfect hedging is theoretically possible but often impractical due to costs and imperfect correlations.
Common Hedging Strategies
- Futures Contracts: Sell index futures to offset equity portfolio risk
- Options Strategies: Protective puts or collar strategies for downside protection
- Inverse ETFs: Short positions through exchange-traded funds
- Cross-Hedging: Using correlated but not identical instruments
Important Disclaimer
This calculator provides estimates only. Hedge ratios may need adjustment for dividends, contract expirations, and changing market conditions. Consult a financial advisor before implementing any hedging strategy.
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Hedge Ratio Calculator: A Complete Guide
What Is a Hedge Ratio?
A hedge ratio measures how much of an investment should be hedged to reduce risk. It helps traders and investors protect against price changes.
For example, if you own stocks, you might use futures contracts to offset potential losses. The hedge ratio tells you how many contracts are needed.
Why Is the Hedge Ratio Important?
- Reduces risk by balancing investments.
- Improves portfolio stability against market swings.
- Helps in futures & options trading for better hedging.
Without the right hedge ratio, you could over-hedge (losing profit) or under-hedge (facing high risk).
Types of Hedge Ratios
1. Optimal Hedge Ratio
This ratio minimizes risk between a spot position and its hedge. It is calculated using:
Hedge Ratio (HR)=ρ×(σFσS)
Where:
- ρ (rho) = Correlation between spot & futures prices
- σₛ (sigma_S) = Standard deviation of spot prices
- σ_F (sigma_F) = Standard deviation of futures prices
2. Delta Hedge Ratio
Used in options trading, it shows how much the option price changes with the underlying asset.
[
Delta Hedge Ratio=Option Delta×Number of Contracts
3. Minimum Variance Hedge Ratio
This ratio reduces price volatility. It is common in commodity trading.
Minimum Variance HR=Variance(F)Covariance(S,F)
How to Calculate Hedge Ratio? (Step-by-Step)
Step 1: Gather Data
- Spot price history
- Futures price history
Step 2: Find Correlation (ρ)
Use Excel or statistical tools to find how spot and futures prices move together.
Step 3: Calculate Standard Deviations (σₛ & σ_F)
Measure price volatility for both spot and futures.
Step 4: Apply the Formula
Plug values into the optimal hedge ratio formula.
Example Calculation
| Month | Spot Price (S) | Futures Price (F) |
|---|---|---|
| Jan | $100 | $102 |
| Feb | $105 | $104 |
| Mar | $98 | $100 |
- Correlation (ρ) = 0.95
- σₛ (Spot SD) = $3.5
- σ_F (Futures SD) = $2.0
HR=0.95×(2.03.5)=1.66
Interpretation: You need 1.66 futures contracts per spot unit to hedge properly.
Free Hedge Ratio Calculator (Excel Template)
[Download Here] – A pre-built Excel sheet that auto-calculates hedge ratio using historical data.
Benefits of Using a Hedge Ratio Calculator
✅ Saves Time – No manual math needed.
✅ Improves Accuracy – Reduces human errors.
✅ Better Risk Management – Finds the perfect hedge balance.
FAQs
1. What is a good hedge ratio?
A ratio near 1.0 means a strong hedge. Below 0.5 may not fully protect against risk.
2. Can hedge ratio be more than 1?
Yes, if futures are less volatile than the spot price.
3. How often should I recalculate hedge ratio?
Update monthly or when market conditions change.
Final Thoughts
A hedge ratio calculator is essential for risk management. It helps traders and investors make smarter hedging decisions.
Use the formula, Excel template, or online tools to find your optimal hedge ratio. This way, you protect profits while minimizing losses.
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