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 ?
For comparison, the hedge effectiveness index [e.sup.*] with different lag hedge ratios [h.sup.*.sub.t-[tau]], [tau] = 0,1,2 ([tau] = 0 represents contemporaneous time, [tau] = 1 is 1-day-later lag time, and [tau] = 2 is 2-day-later lag time), and then evaluate the variance reduction over the conventional MV method, the hedge ratio of MV models in (7), the hedge ratio of SDE model in (13), and the hedge ratio of FSDE model in (32).
"They've been quiet for the first six to seven months of the year and their hedge ratios were low, but they're now coming out to hedge.
Hedge ratios for the year (t), [h.sup.*.sub.t] are computed using three years' data prior to the year of hedge.
After discussing the volatile behavior of agricultural prices, the static and time varying optimal hedge ratios are estimated through several methods.
(4) Corporate hedging literature has, however, consistently found that actual hedge ratios for commodity firms are significantly lower than those prescribed under the risk-minimization approach, because while making a hedging decision, firms consider not only risk minimization but also the hedging costs incurred.
For residual exposures that the organization can't eliminate through netting or customer/supplier negotiations, the treasury team may simply follow a preset corporate FX policy for hedge ratios. If policy allows it, however, treasury can further manage FX trading costs by considering both the hedging cost (forward points) and the value at risk (VaR) for each currency pair.
Under departures from the cost-of-carry theory, historical market information, conditional variance, and conditional correlation implied from emissions allowances futures markets have significant impacts on time-varying hedge ratios and hedging effectiveness.
"Looking at the hedge ratios, they fell year over year in general, so it looks to me like some respondents may have unwound some LDI hedging." Unfortunately, NEPC didn't ask whether this unwinding was unintentional -- which leaves the opportunity for them (or aiCIO) to ask even more questions next year.
The Effect of Asymmetries on Optimal Hedge Ratios. Journal of Business, 75, 333-352.
publishes the results of this analysis and examines the overall excess returns achieved by active currency overlay managers against benchmark, across different styles, hedge ratios and base currencies.
The reported hedge ratios may vary significantly, depending on Fortum's actions on the electricity derivatives markets.
Optimal hedge ratios were determined across all months, all seasons, individual months, and by individual season.