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.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

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.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.
References in periodicals archive ?
Because a higher correlation increases both the likelihood of type-a and type-b losses, it is unclear a priori if such higher correlation should positively or negatively impact the optimal hedge ratio. The optimal hedge ratio will depend on how the other state variables influence the likelihood of losses of type a or b.
[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.
Hedge ratios for the year (t), [h.sup.*.sub.t] are computed using three years' data prior to the year of hedge.
The basis risk is the reason to estimate the optimal hedge ratio (OHR).
Time-Varying Hedge Ratios. In Figure 5 and Table 4, [hr.sub.1] denotes optimal hedge ratio of futures contracts that are the closest to maturity, [hr.sub.2] denotes optimal hedge ratio of futures contracts that are the second closest to maturity, and [hr.sub.3], [hr.sub.4], and [hr.sub.5] are defined similarly.
Hedge Ratio (%) Defined as [cov (CDS return, Bond return)/ var(CDS return)] (i.e., the ratio of the covariance of the returns of CDS and the returns of the insurer's bond investment to the variance of CDS return) for CDS users and zero for CDS nonusers.
The reported hedge ratios may vary significantly, depending on Fortum's actions on the electricity derivatives markets.
Once they choose a contract expiration, it is possible to determine the optimal hedge ratio and completely eliminate portfolio risk.
It differs in that it explicitly allows for a hedge ratio that differs from 1.0 and for the exclusion of part of the change in the value of the derivative; that is, that the hedger implements a hedge based on the results of the regression estimates.
The retrospective Regression Method test of effectiveness is also defined by Equation (6), except that the retrospective test uses the actual hedge ratio the hedger implemented.
Our Study's Use of Derivative Disclosures to Compute the Hedge Ratio