{"id":25649,"date":"2013-05-17T11:28:51","date_gmt":"2013-05-17T05:58:51","guid":{"rendered":"http:\/\/vskills.in\/certification\/tutorial\/?p=25649"},"modified":"2024-04-12T14:18:19","modified_gmt":"2024-04-12T08:48:19","slug":"hedge-ratio","status":"publish","type":"page","link":"https:\/\/www.vskills.in\/certification\/tutorial\/hedge-ratio\/","title":{"rendered":"Hedge Ratio"},"content":{"rendered":"\n
\"Hedge<\/a><\/figure><\/div>\n\n\n

Let’s learn about hedge ratio. Hedging is reducing or eliminating financial risk by entering into a transaction that will protect against loss through a compensatory price movement. It is the ratio of the size of position taken in the futures contracts to the size of the exposure in the underlying asset.<\/p>\n

A hedge ratio is a mechanism for calculating the number of futures needed to hedge against the risk of loss in a portfolio of commodity derivatives. It is also known as a \u2018delta\u2019.<\/span><\/p>\n

A delta is commonly used to compare the value of a position protected by a hedge with the size of the actual position. For instance, you need to calculate the number of options required to offset a change in value resulting from a price change in 10 commodities at a given point in time. If you need two options to offset the change, the delta is 2.<\/span><\/p>\n

The hedge ratio also identifies and assists to reduce any risks in futures contracts. Hence, it may be utilized to compare the value of a commodity futures contract with the value of the underlying instrument that is being hedged.<\/p>\n

It compares the value of a position protected through the use of a hedge\u00a0with the size of the entire position itself. A\u00a0hedge ratio\u00a0may also be a comparison of the value of futures contracts purchased or sold to the value of the cash commodity being\u00a0hedged<\/p>\n