Hedge Ratio Calculator

Hedge Ratio

It is a ratio that reflects the portion of investment hedged from the risk. A ratio equal to 1 or 100% indicates that the position of the investor is completely hedged while a ratio equals to 0 expresses that the investor has made no provision for hedging his investment. It guides investors in taking positions for reducing the risk exposure. A hedge ratio calculator is made to help one in the effortless calculation.

Formula

The formula for calculating hedge ratio is as follows:

Hedge Ratio = Hedge Value / Total Position Value

About the Calculator / Features

The hedge ratio calculator effortlessly calculates the ratio by entering only the following figures:

  • Hedge value
  • Total position value
Hedge Ratio Calculator

Calculator

How to Calculate using Calculator

For calculating hedge ratio using calculator, the user is required to insert the following details into the calculator:

Hedge Value

Hedge value means the portion of the portfolio that the investor has hedged. For example, investor hedges 20% of his investment then the hedge value is equal to 20% of the total portfolio value.

Total Position Value / Portfolio Value

The total position value or Portfolio Value is the current market value of the portfolio. The market value of portfolio position can be either more or less from its original value. If after the hedge this value increases, the hedge ratio will effectively decrease as the portfolio value has increased. The investor is free to make adjustments to his hedged percentage/position depending upon his risk exposure level as well as his view of the market. Similarly, a decrease in this value will increase the hedge ratio.

Example

Let us take an example for more clarity. Assume that the portfolio of Mr. X has a value of $25,000. And he hedges 60% of the value of portfolio, that is, $15,000 (25,000 * 60%).

Here, the hedge ratio is 60%. But let us consider the following cases for making the concept more simple and easy to understand.

Case 1

If total position value changes to $28,000

Hedge Ratio = 15,000 / 28,000 = 0.54

Interpretation

Due to an increase in total position value, the hedge ratio has decreased from 60% to 54%. This simply means that the risk exposure of investment has increased. Here, the investor is required to adjust his position to minimize this risk.

Case 2

If total position value changes to $21,500

Hedge Ratio = 15,000 / 21,500 = 0.69

Interpretation

Here, a decrease in the value of the total position has increased the hedge ratio. This simply means that the portion of the risk in the overall portfolio has reduced and the portion hedged from risk has increased from 60% to 69%. This ultimately means that the position of the investor is more secured from risk than earlier.

Final Words

It defines the risk in the investor’s portfolio and serves as a guideline to minimize this risk. One can get an estimate of his risk position. However, it is a difficult task to arrive at a perfect hedge ratio in practical life.



Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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