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. In contrast, a ratio equal to 0 expresses that the investor has made no provision for hedging his investment. It guides investors in taking positions to reduce risk exposure. A hedge ratio calculator is made to help one in effortless calculation.
The formula for calculating the hedge ratio is as follows:
Hedge Ratio = Hedge Value / Total Position Value
Hedge Ratio Calculator
How to Calculate using Calculator?
For calculating the hedge ratio using a 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, an 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 a 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.