Hedge ratio

1. Hedging instruments.

The proportion of a hedging instrument required to hedge an underlying position, compared with the amount of the underlying position itself.

Example

If four options are required to hedge a position of one unit of the underlying asset:

Hedge ratio = ¼

= 0.25.

2. Risk management.

The proportion of a risk exposure that an organisation chooses to hedge.

Also known as a hedging ratio.

Corporates increase FX hedging

“While there will always be some [corporates] that don’t hedge their FX risk at all, those that haven’t are now considering doing so given recent market volatility and negative currency impacts.

“Those corporates that already had formal hedging programmes in place are now increasing their hedge ratios to protect their bottom lines.”

Eric Huttman, CEO at MillTechFX, The Treasurer online - 14 October 2022.

See also

• Bottom line
• Corporate
• Exposure
• Foreign exchange risk
• FX
• Hedge
• Hedge accounting
• Hedging
• Risk management
• Volatility