DEFINITION of 'Hedge Ratio'
1. A ratio comparing the value of a position protected via a hedge with the size of the entire position itself.
2. A ratio comparing the value of futures contracts purchased or sold to the value of the cash commodity being hedged.
2. A ratio comparing the value of futures contracts purchased or sold to the value of the cash commodity being hedged.
INVESTOPEDIA EXPLAINS 'Hedge Ratio'
1. Say you are holding $10,000 in foreign equity, which exposes you to currency risk. If you hedge $5,000 worth of the equity with a currency position, your hedge ratio is 0.5 (50 / 100). This means that 50% of your equity position is sheltered from exchange rate risk.
2. The hedge ratio is important for investors in futures contracts, as it will help to identify and minimize basis risk.
2. The hedge ratio is important for investors in futures contracts, as it will help to identify and minimize basis risk.
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