hedge ratio


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Hedge ratio (delta)

For options, ratio between the change in an option's theoretical value and the change in price of the underlying stock at a given point in time. For convertibles, percentage of a convertible bond representing the number of underlying common shares sold against the shares into which bonds are convertible. If a preferred is convertible into 2000 common shares, a 75% hedge ratio would be short (long) 1500 common for every 1000 preferred long (short). See: Delta.

Hedge Ratio

1. A ratio of the value of the proportion of a position that is hedged to the value of the entire position. A hedge ratio shows how exposed an investment is to risk. For example, if a hedge ratio is .65, then 65% of the investment is protected from risk, while 35% remains exposed.

2. A ratio of the value of a futures contract to the value of the underlying asset. This is used to identify and minimize risk in the contract.

hedge ratio

The number of options required to offset the change in value due to a price change in 100 shares of common stock. For example, if two options are needed to offset value changes for 100 shares of stock, the hedge ratio is 2.
References in periodicals archive ?
22] give the conventional risk-minimizing hedge ratio under the condition that the joint distribution of spot and futures returns remains the same over time.
For explanation of hedging effectiveness, basis risk and derivation of hedge ratio, see, among others, Hull (2012).
Bystrom (2003), in a study focused on the electricity market, showed that the static OLS hedge ratio can perform better that the RW OLS or the GARCH time varying ratios.
The optimal hedge ratio for all months and the optimal hedge ratios by season were simulated to determine the extent of over or under hedging (Table 2) (see Johnson, 2008, p.
If futures only reflect carrying costs, the risk minimizing hedge ratio in (3) then reduces to:
As mentioned in Section I the optimal hedge ratio has usually been found by regressing the returns to holding the spot asset ([S.
A fixed or static hedge ratio works only when the inverse relationship between the hedge asset and the risk being hedged remains stable.
Second, the hedge ratio is not stable over time - as the mortgages age, the hedge ratio will need to be recalculated.
PHH's ratings remain on Negative Outlook reflecting expected pressure on operating performance in 2012 from contemplated liquidity actions, reduced loan origination in the correspondent channel and its impact on the natural hedge ratio, MSR-related volatility inherent in the company's business model, and potential increase in losses from loan repurchases.
The Class A units daily Net Asset Values (NAVs) were subsequently recalculated attributing a hedge ratio of 100%, and it was determined that the cumulative loss to the units over the Reimbursement Period (as defined below) was approximately 1.
In "Dynamic Hedging Based on Fractional Order Stochastic Model with Memory Effect" the authors construct the minimum variance model for the estimation of the optimal hedge ratio based on the stochastic differential equation.
An overlay manager can look at it daily to maintain the hedge ratio.