Hedge Ratio Calculator
Compute the hedge ratio: hedge position ÷ total exposure — how much of the portfolio's market risk is already covered by hedging.
Input Data
Results
At a glance:The hedge ratio measures the share of total exposure already covered by hedging: hedge ratio = hedge position value ÷ total exposure value. 0 = fully unhedged (all market risk); 100% = fully hedged (theoretically no net risk). Investors tune the ratio to balance 'lower risk' with 'keeping potential gains and reducing hedging cost'. The ratio is always non-negative. Unhedged = total exposure − hedge position.
Formula
Hedge ratio = hedge position ÷ total exposure × 100%.
Unhedged = total exposure − hedge position.
Ranges 0% (none) to 100% (full).
$$$\\dfrac{375{,}000}{1{,}000{,}000}=37.5\\%$$$How to Use
- Enter the hedge position value.
- Enter the total exposure value.
- View the hedge ratio and unhedged exposure.
Hedge ratio at various hedge positions (total exposure HK$1M)
| Hedge position | Total exposure | Hedge ratio | Unhedged |
|---|---|---|---|
| HK$375,000 | HK$1,000,000 | 37.5% (partial) | HK$625,000 |
| HK$800,000 | HK$1,000,000 | 80% (high) | HK$200,000 |
| HK$1,000,000 | HK$1,000,000 | 100% (full) | HK$0 |
Higher hedge position → higher ratio, lower unhedged. 100% = theoretically no net risk.
Case Studies
Case 1: Hedge ratio and unhedged exposure
An investor holds a HK$1,000,000 stock portfolio (total exposure) and hedges HK$375,000 with index futures.
Hedge ratio = 375,000 ÷ 1,000,000 = 37.5%; unhedged = 1,000,000 − 375,000 = HK$625,000.
Interpretation: 37.5% of the exposure is hedged; 62.5% (HK$625,000) remains exposed to market price risk. A partial hedge — the hedged part offsets losses in a fall, but the unhedged 62.5% is still affected; if the market rises, the unhedged part still participates. The ratio shows at a glance 'how much risk is covered, how much open'.
Case 2: Higher ratio is not always better — risk vs cost
Same HK$1M portfolio, three hedge levels. None (0%): full market risk, largest loss in a fall but full upside and no cost. Partial (37.5%): some loss offset, some upside kept, moderate cost. Full (100%): almost no loss in a fall but almost no upside and the highest cost (rolling, premiums, margin).
From 0% to 100% is a spectrum between 'lower downside' and 'keep upside, save cost'.
Interpretation: the ratio is not the higher the better. 100% removes price risk but gives up gains and bears cost (premiums, rolling, margin funding). The right ratio depends on three things: risk tolerance (more conservative → higher), hedging cost (high cost makes over-hedging unwise), and market view (bullish → keep more unhedged to join the rise). Most use partial hedging for balance. Note: this is the simple 'share hedged' ratio; for the risk-minimising optimal ratio, use correlation and standard deviations of spot vs futures (see the optimal-hedge-ratio calculator).
FAQ
Is a higher hedge ratio always better?
Not necessarily. 100% hedging maximally removes price risk but also gives up potential gains and bears hedging cost. The right ratio depends on risk tolerance, hedging cost and market view.
Hedge ratio vs optimal hedge ratio?
This hedge ratio is a simple 'share hedged' proportion; the optimal hedge ratio uses the correlation and standard deviations of spot vs futures to find the theoretically risk-minimising proportion.
Common hedging tools?
Common tools include futures, options, forwards, swaps and inverse ETFs or currency hedges to offset the price move of the underlying asset.
How can Hong Kong investors hedge; what tools and costs?
Hedging means holding an instrument that moves opposite to your existing position, so losses on the position are offset by gains on the hedge when the market turns adverse, lowering overall risk. Tools and methods: (1) Futures — e.g. hold a stock basket, fear a market drop, sell index futures (HSI futures); if the market falls, the stock loss is offset by the short futures gain. Low cost, liquid, but margin and rolling needed. (2) Options — buying puts insures downside; if the market falls the put rises to compensate, while upside keeps only the premium cost (protective put). (3) Forwards and swaps — mainly FX and rates; a firm with foreign receivables locks the rate with a forward to avoid FX risk. (4) Inverse ETFs — designed to move opposite to an index; retail can buy to hedge, simple but better short-term (long-term has compounding drift). (5) Currency hedges — hedging FX when investing overseas so returns track the asset, not the exchange rate (many funds offer a hedged class). For Hong Kong investors, the easiest are HSI/HSCEI futures and options, single-stock options, inverse ETFs and currency-hedged funds on the HKEX. Note hedging is not free — futures need margin and rolling, options need premium, inverse ETFs have fees and tracking error; costs eat returns. So hedging trades cost for lower risk — set the ratio by risk tolerance, cost and view. This calculator quantifies the hedged share.
This hedge ratio vs the optimal hedge ratio — which to use?
Two related but different concepts. This calculator's 'hedge ratio' is a simple 'share hedged': hedge ratio = hedge position ÷ total exposure — answering 'what % of my total exposure is already covered by hedges'. E.g. exposure 1M, hedged 0.375M → 37.5%. Intuitive, for quickly seeing risk coverage and planning 'how much to hedge'; it is a ratio you choose by risk appetite and view. The 'optimal hedge ratio (minimum-variance)' is the theoretically risk-minimising proportion: optimal = correlation(spot, futures) × (σ spot ÷ σ futures), equivalently covariance ÷ futures variance (the regression beta). It answers 'to minimise post-hedge variance, how many futures per unit of spot' — depending on how tightly spot and hedge move (correlation) and their volatility ratio. When the hedge is imperfect (basis risk), 1:1 may not be optimal; the optimal ratio tells the adjusted best. Which to use: (1) to know 'how much is hedged, how much remains open' or plan 'hedge what fraction', use this calculator — simple. (2) to hedge a non-identical spot with a future (e.g. HSI futures against an imperfect basket) and find 'futures per unit spot for minimum variance', use the optimal hedge ratio — it accounts for correlation and volatility. In practice they pair: optimal decides the spot/futures mix, this ratio checks total coverage. This site has an optimal-hedge-ratio calculator to pair with.
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References
Content review: Calculatorism Finance Team. Results are for reference only; please refer to the relevant authorities for the official figures.