What is HEDGE RATIO in the context of put and call options. I know how to calculate it but really can't understand the funda of hedging and hedge position! Please make it fundamentally clear!!!
4 Replies
CA. Dashrath Maheshwari
(TaXpert)
(15103 Points)
Replied 10 April 2008
Hedge funds are complex, risky investment vehicles. Other funds, such as most equity mutual funds, have straightforward investment strategies. By contrast, equity-oriented hedge funds may engage in various trading practices and investment strategies. They may be short funds, long-short funds or market neutral funds. And equity-oriented hedge funds are only a small sliver of the hedge fund universe. Thus, assessing the risk of hedge funds is a challenge
CA Amarpal
(Chartered Accountants)
(149 Points)
Replied 12 April 2008
Hedge ratio is just to protect yourself from loss which may come on exercising on put or call option.
Hege is used when rate for future can be forcasted, and two rates one is higher than exercise price and other one is lower than exercise price.
Krunal Raichura
(Financial Advisory)
(2134 Points)
Replied 14 April 2008
Investopedia says -
A ratio comparing the value of a position protected via a hedge with the size of the entire position itself.
A ratio comparing the value of futures contracts purchased or sold to the value of the cash commodity being hedged.
Say you are holding $10,000 in foreign equity, which exposes you to currency risk. If you hedge $5,000 worth of the equity with a currency position, your hedge ratio is 0.5 (50 / 100). This means that 50% of your equity position is sheltered from exchange rate risk.
According to me, the hedge ratio is the proportion of the hedge position to the total position. For example, if u have a portfolio of 40 crore rs, and u sell baskets of index futures to the tune of 10 crores only, then that means you have hedge only 25% of your total portfolio against the downside risk.
CA CS CIMA Prakash Somani
(Landmark Group)
(23502 Points)
Replied 26 April 2008
In simple words Hedging means...Security against contingency......
means if u hv one call option thyn to hedge ur position u will take put option which will due on same date on which call opton is due....
i hope this is enough to understand the funda of HEDGE...
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