What is hedge ratio?Hedge Ratio
The size of the hedge relative to the original exposure; 1 means a full hedge, 0.5 means hedging half.
Learn “hedge ratio” in an animated lesson
- Hedging StrategiesCross Hedging: Using a Related Instrument
An airline wants to hedge jet fuel, but there's no good jet fuel futures contract. It has to borrow the closest-priced instrument instead.
- Hedging StrategiesHedge Ratio and Basis Risk
Spot and futures don't move in lockstep. How much should you hedge? The optimal ratio depends on correlation and volatility.
- Hedging StrategiesWhat Is Hedging?
A farmer has a silo of wheat and fears prices falling before the harvest. Sell a futures contract, and the gains and losses on the two legs cancel out.
Related terms
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Go to “Cross Hedging: Using a Related Instrument”