What Is a "Hedge Ratio" and How Is It Calculated? ⎊ Path

What Is a “Hedge Ratio” and How Is It Calculated?

A hedge ratio is the number of futures contracts required to hedge a given exposure in the underlying asset. The simplest calculation is the "naive" hedge ratio, which is the size of the spot position divided by the size of one futures contract.

A more accurate measure is the "minimum variance hedge ratio," which uses the ratio of the standard deviation of the spot price change to the futures price change, multiplied by the correlation coefficient between the two.

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Glossar

Hedge Ratio

Calculation ⎊ The Hedge Ratio quantifies the necessary size of a derivative position required to offset the price risk inherent in an underlying asset or portfolio, representing the change in the derivative's price relative to the change in the underlying.