Can someone pls explain hedge ratio?

CFA Level III Derivatives
#1

Can someone please explain hedge ratio

#2

You’re a GBP investor with a EUR 10 million investment. You’ve hedge the GBP/EUR exchange rate on EUR 6 million. That’s a 60% hedge ratio: the ratio of the size of the hedge to the size of the exposure.

#3

IS delta and hedge ratio equivalent? And what the formula to compute it?

#4

Not necessarily.

If you want to hedge 100% of the price risk in an equity position by using options, or 100% of the price risk in an option position by using stock or options, then the delta(s) of the option(s) will enter into the equation. For example, if you have a long position in 100 shares of a stock and you want to hedge 100% of the price risk with put options that have a delta of 0.4, then you’ll need to buy puts on

\frac{100}{0.4} = 250

shares of stock.

1 Like
#5

thanks

#6

My pleasure.