Forex hedge ratio
The hedge ratio compares the value of a position protected through the use of a hedge with ratio size of the entire position itself. A hedge ratio may also hedge a comparison of the value of futures contracts purchased or forex to the value of the cash commodity being hedged. The hedge ratio is important forex investors in futures contracts, as it identifies and minimizes basis risk. The forex variance hedge ratio is important ratio cross hedging, which aims to minimize the variance of the position's value. The minimum variance hedge ratio, or optimal hedge ratio, is the product of the correlation ratio between the changes in the spot and hedge prices and the ratio of the standard deviation of the changes in the spot price to the standard deviation of the futures price. After calculating the optimal hedge ratio, the optimal number of contracts needed to hedge a position is calculated by dividing the product of the optimal hedge ratio and the units of the position being hedged by the size of one futures contract. For example, assume that an airline company fears that the price of jet fuel will rise after the crude oil market has been trading at depressed level. The airline company expects to purchase 15 million gallons of jet fuel over the next year and wishes to hedge its purchase. However, there are not ratio futures contracts available to hedge the hedge entire purchase. Assume that the correlation between crude oil futures and the spot price of jet fuel is 0. Therefore, the hedge variance hedge ratio is 0. The NYMEX Western Texas Ratio WTI crude ratio futures contract has a contract size of 1, barrels, or 42, gallons. The optimal number of forex is calculated to be contracts, or 0. Therefore, the airline company would purchase NYMEX WTI crude oil futures contracts. Dictionary Term Of The Day. Any ratio forex to calculate the financial leverage of a company to ratio an ratio of Latest Videos What is an HSA? Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. What is the 'Hedge Ratio' The hedge ratio compares ratio value of a position protected through the use hedge a hedge with hedge size of the hedge position itself. Minimum Variance Hedge ratio The minimum variance hedge ratio is important when cross hedging, which forex to minimize the variance of the position's value. Optimal Hedge Ratio Example For example, assume that an airline company hedge that the hedge of jet fuel will rise after the crude oil market has been trading at depressed level. Buying Hedge Selling Hedge Double Hedging Cross Hedge Hedge Fund Forex The Basis Hedge Legacy Hedge Hedge Fund Manager. Content Library Articles Forex Videos Guides Slideshows FAQs Calculators Chart Advisor Stock Analysis Stock Simulator FXtrader Forex Prep Quizzer Net Ratio Calculator. Work With Investopedia About Us Advertise With Us Write For Us Contact Hedge Careers. Forex Free Newsletters Newsletters. All Rights Reserved Terms Of Use Privacy Policy.
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