hedge ratio

The relationship between the number of contracts required for a direct hedge and the number of contracts required to hedge in a specific situation. The concept of hedging is to match the size of a positive cash flow from a gaining futures position with the expected negative cash flow created by unfavorable cash market price movements. If the expected cash flow from a $1 million face-value T-Bill futures contract is one-half as large as the expected cash market loss on a $1 million face-value instrument being hedged (for whatever reason), then two futures contracts are needed to hedge each $1 million of face value. The hedge ratio is 2:1. Hedge ratios are used frequently when hedging with futures options, interest rate futures, and stock index futures, to aid in matching expected cash flows. Generally, the hedge ratio between the number of futures options required and the number of futures contracts is 1: 1. For interest rate and stock index futures, the ratios may vary depending on the correlation between price movement of the assets being hedged and the futures contracts or options used to hedge them. Most agricultural hedge ratios are 1: 1. The CENTER ONLINE Futures Glossary

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The relationship between the size of a position needed in a hedge instrument and the size of the position being hedged. The hedge ratio is determined by the delta. American Banker Glossary

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( 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). Bloomberg Financial Dictionary

See: delta. Bloomberg Financial Dictionary

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For futures the number of contracts required to hedge one contract's value of the underlying asset. For options see Delta. Exchange Handbook Glossary