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Futures Hedge Ratio Calculator

Calculate optimal hedge ratio for futures contracts to minimize basis risk and hedge spot positions effectively.

Futures Hedge Ratio Calculator

Calculate optimal hedge ratio for futures contracts to minimize basis risk and hedge spot positions effectively.

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Guide

Calculating optimal hedge ratio for futures contracts

  • Hedge ratio determines how many futures contracts are needed to hedge a spot position. Optimal hedge ratio minimizes basis risk (difference between spot and futures prices).
  • Hedge Ratio = (Spot Volatility / Futures Volatility) × Correlation. If volatilities are unknown, use price ratio: (Spot Price / Futures Price) × Correlation.
  • Perfect hedge ratio is 1.0 when spot and futures prices move identically. Lower correlation or different volatilities require adjusted hedge ratios.
  • Futures Contracts = (Hedge Ratio × Spot Value) / (Futures Price × Contract Size). Round to nearest whole contract.
  • Basis risk arises when spot and futures prices don't move in perfect correlation. Monitor basis and adjust hedge ratio as correlation or volatilities change.

Frequently Asked Questions

Futures hedging, hedge ratio, and basis risk management

What is a hedge ratio?

Hedge ratio is the ratio of futures contracts to spot position needed to minimize risk. A hedge ratio of 1.0 means one futures contract per unit of spot position.

How is hedge ratio calculated?

Hedge Ratio = (Spot Volatility / Futures Volatility) × Correlation. If volatilities are unknown, use price ratio: (Spot Price / Futures Price) × Correlation.

What is a perfect hedge ratio?

Perfect hedge ratio is 1.0 when spot and futures prices move identically (correlation = 1.0, same volatility). In practice, hedge ratios differ from 1.0 due to basis risk.

How do I calculate number of futures contracts?

Futures Contracts = (Hedge Ratio × Spot Value) / (Futures Price × Contract Size). Round to nearest whole contract, as fractional contracts are not traded.

What is basis risk?

Basis risk is the risk that spot and futures prices don't move in perfect correlation, causing the hedge to be imperfect. Basis = Spot Price - Futures Price.

How does correlation affect hedge ratio?

Lower correlation between spot and futures requires adjusted hedge ratio. If correlation is 0.8, hedge ratio is reduced proportionally, requiring fewer futures contracts.

Should I hedge 100% of my position?

Not necessarily. Optimal hedge ratio may be less than 1.0 if correlation is imperfect or volatilities differ. Over-hedging (ratio >1.0) can increase risk if basis moves against you.

How often should I recalculate hedge ratio?

Recalculate when correlation or volatilities change significantly, when basis changes, or periodically (weekly/monthly) to maintain optimal hedging effectiveness.

Can I use this for cross-hedging?

Yes, but cross-hedging (hedging with different asset) requires lower correlation and adjusted hedge ratio. Basis risk is typically higher in cross-hedging scenarios.

What are the costs of hedging with futures?

Costs include margin requirements, transaction costs, basis risk, and opportunity cost if spot price moves favorably. Consider these costs when deciding whether to hedge.

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Futures Hedge Ratio Calculator

Calculate optimal hedge ratio for futures contracts to minimize basis risk and hedge spot positions effectively.

How to use Futures Hedge Ratio Calculator

Step-by-step guide to using the Futures Hedge Ratio Calculator:

  1. Enter your values. Input the required values in the calculator form
  2. Calculate. The calculator will automatically compute and display your results
  3. Review results. Review the calculated results and any additional information provided

Frequently asked questions

How do I use the Futures Hedge Ratio Calculator?

Simply enter your values in the input fields and the calculator will automatically compute the results. The Futures Hedge Ratio Calculator is designed to be user-friendly and provide instant calculations.

Is the Futures Hedge Ratio Calculator free to use?

Yes, the Futures Hedge Ratio Calculator is completely free to use. No registration or payment is required.

Can I use this calculator on mobile devices?

Yes, the Futures Hedge Ratio Calculator is fully responsive and works perfectly on mobile phones, tablets, and desktop computers.

Are the results from Futures Hedge Ratio Calculator accurate?

Yes, our calculators use standard formulas and are regularly tested for accuracy. However, results should be used for informational purposes and not as a substitute for professional advice.