Definition of Hedge Ratio

The definition of hedge ratio is a ratio that compares the value of your position that is protected by a hedge with the rest of your position. For some traders, the definition of hedge ration indicates the value of futures contracts bought or sold compared to the amount of cash commodity being hedged.

Here's an example of the definition of hedge ratio: an investor is holding $1,000 in foreign currency. If you hedge $500 worth of the equity with a currency position, the hedge ration would be .5 (50 percent). In other words, 50 percent of the equity position is sheltered from the exchange rate risk.

Most investors and traders in futures pay attention to the hedge ratio because it helps them recognize and minimize basis risk.

The definition of hedge ratio is good to know. However, some investors don't have the time or inclination to study the definition of hedge ratio or learn other abstract ratios and statistics. The just want to make money automatically.

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