1. What is the Hedge Ratio?

The Hedge Ratio (HR) is a measure used to determine the optimal amount of hedging instrument needed to offset the risk of an asset. It's calculated using the value of the asset, the value of the hedge, and their correlation.

2. How Does the Calculator Work?

The calculator uses the Hedge Ratio formula:

Where:

• \( Value\ Asset \) — Value of the asset being hedged (USD)
• \( Value\ Hedge \) — Value of the hedging instrument (USD)
• \( Correlation \) — Correlation coefficient between asset and hedge (-1 to 1)

Explanation: The ratio indicates how many units of the hedging instrument are needed per unit of the asset to minimize risk.

3. Importance of Hedge Ratio

Details: An accurate hedge ratio is crucial for effective risk management in financial markets, helping investors minimize exposure to price fluctuations.

4. Using the Calculator

Tips: Enter the value of the asset and hedge in USD, and their correlation coefficient (between -1 and 1). All values must be valid.

5. Frequently Asked Questions (FAQ)

Q1: What does a hedge ratio of 1 mean?
A: A ratio of 1 means you need an equal value of the hedging instrument to perfectly offset the asset's risk (assuming perfect correlation).

Q2: What's the difference between hedge ratio and beta?
A: While both measure risk, beta compares an asset's volatility to the market, while hedge ratio calculates the optimal hedge amount.

Q3: How often should hedge ratios be recalculated?
A: They should be reviewed regularly as market conditions, asset values, and correlations change over time.

Q4: Can hedge ratio be negative?
A: Yes, when the correlation is negative, indicating the hedge moves opposite to the asset.

Q5: What are limitations of this calculation?
A: It assumes constant correlation and doesn't account for transaction costs or basis risk.