1. What Is Hedge Ratio?

The hedge ratio is a financial metric that determines the percentage of an investment position that should be hedged to eliminate risk. In the UK market, it's particularly important for portfolio managers and institutional investors.

2. How Does the Calculator Work?

The calculator uses the hedge ratio formula:

Where:

• \( \beta \) — Beta coefficient of the asset (measure of systematic risk)
• Value of Portfolio Exposure — Total value of the position to be hedged (in GBP)

Explanation: The hedge ratio indicates how much of the position should be hedged based on its volatility relative to the market.

3. Importance of Hedge Ratio

Details: Proper hedging helps UK investors manage market risk, protect against downside movements, and optimize capital allocation in volatile markets.

4. Using the Calculator

Tips: Enter the asset's beta coefficient (available from financial databases) and the GBP value of your exposure. The calculator will determine the appropriate hedge value.

5. Frequently Asked Questions (FAQ)

Q1: What's a typical beta value for UK stocks?
A: Most UK FTSE 100 stocks have betas between 0.8-1.2. High beta (>1.3) indicates more volatility than the market.

Q2: How often should I recalculate hedge ratios?
A: For active portfolios, monthly recalculation is recommended as betas and exposures change.

Q3: Does this work for currency hedging?
A: This calculator is designed for equity positions. Currency hedging requires different calculations.

Q4: What hedging instruments are used in the UK?
A: Common instruments include FTSE futures, options, CFDs, and inverse ETFs.

Q5: Should I hedge my entire portfolio?
A: Most UK investors hedge only portions of their portfolio based on risk tolerance and market outlook.