1. What is Hedge Ratio?

The Hedge Ratio (HR) measures the relationship between price changes of an asset and its hedge instrument. It's a key metric in financial risk management, indicating how much of the hedge instrument is needed to offset price movements in the underlying asset.

2. How Does the Calculator Work?

The calculator uses the Hedge Ratio formula:

Where:

• \( HR \) — Hedge Ratio (decimal)
• \( \Delta P_{asset} \) — Price change of the asset (USD)
• \( \Delta P_{hedge} \) — Price change of the hedge instrument (USD)

Explanation: The ratio shows how many units of the hedge instrument are needed to offset price changes in one unit of the underlying asset.

3. Importance of Hedge Ratio

Details: An accurate hedge ratio is crucial for effective portfolio hedging, risk management, and minimizing exposure to price fluctuations in financial markets.

4. Using the Calculator

Tips: Enter price changes for both the asset and hedge instrument in USD. The hedge instrument's price change cannot be zero.

5. Frequently Asked Questions (FAQ)

Q1: What does a hedge ratio of 1 mean?
A: A ratio of 1 means the asset and hedge instrument move in perfect correlation, with equal magnitude.

Q2: What's the difference between hedge ratio and beta?
A: While both measure sensitivity, beta compares to market index, while hedge ratio compares to a specific hedging instrument.

Q3: How often should hedge ratios be recalculated?
A: They should be monitored regularly as market conditions change, with more frequent reviews during volatile periods.

Q4: Can hedge ratios be negative?
A: Yes, indicating the asset and hedge instrument move in opposite directions.

Q5: What are limitations of this simple hedge ratio?
A: More sophisticated models may account for time horizons, volatility differences, and non-linear relationships.