Hedge Ratio Calculator

Calculate optimal hedge ratios for effective portfolio risk management. Minimize risk exposure and optimize hedging strategies with advanced analytics.

✓ Risk Management ✓ Portfolio Hedging ✓ Optimal Ratios

Hedge Ratio Calculator

Portfolio & Hedge Parameters

Total value of portfolio to hedge

Portfolio beta relative to market

Current price of hedge instrument

Beta of hedge instrument

Statistical Parameters

Annual volatility of portfolio

Annual volatility of hedge instrument

Correlation between portfolio and hedge (-1 to 1)

Type of hedging instrument

Advanced Options

Contract size multiplier (for futures)

Expected hedge effectiveness

Hedging time period

Annual risk-free interest rate

Hedge Ratio Formula

Calculate optimal hedge ratios for risk management

Minimum Variance Hedge Ratio:

h* = ρ × (σₚ / σₕ)
Where: h* = Optimal hedge ratio, ρ = Correlation, σₚ = Portfolio volatility, σₕ = Hedge volatility

Hedging Scenarios

Stock Portfolio Hedge
$1M portfolio with S&P 500 futures
Currency Hedge
International exposure with FX forwards
Commodity Hedge
Oil exposure with futures contracts

Hedge Instruments

Futures: Standardized contracts for future delivery
Options: Right but not obligation to buy/sell
Forwards: Customized OTC contracts
Swaps: Exchange of cash flows
ETFs: Exchange-traded funds for diversification

Risk Metrics

✓ Beta: Systematic risk measure
✓ Volatility: Price fluctuation measure
✓ Correlation: Relationship strength
✓ VaR: Value at Risk estimation
✓ Hedge Effectiveness: Risk reduction achieved
Advertisement

Understanding Hedge Ratios

A hedge ratio determines the proportion of a position that should be hedged to minimize risk. It's crucial for effective portfolio risk management.

  • Risk Reduction: Minimize portfolio volatility through hedging
  • Optimal Sizing: Determine the right amount of hedge instruments
  • Cost-Benefit: Balance hedging costs with risk reduction
  • Dynamic Hedging: Adjust ratios as market conditions change

Hedging Applications

Portfolio Protection

Protect equity portfolios against market downturns.

Currency Risk

Hedge foreign exchange exposure in international investments.

Commodity Exposure

Manage price risk in commodity-dependent businesses.

Interest Rate Risk

Hedge against interest rate fluctuations in bond portfolios.