HEDGE RATIO Meaning and
Definition
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The term "hedge ratio" refers to a financial concept used to describe the degree and effectiveness of hedging performed by an investor or a company to mitigate or offset potential risks in their investment portfolios. It represents the amount of exposure an investor retains to an underlying asset or security, despite employing hedging strategies.
The hedge ratio is typically expressed as a mathematical formula or a ratio, indicating the relationship or correlation between the value of a portfolio or position and the value of the hedging instrument being used. It helps in determining the proportion of the hedging instrument required to offset or protect against potential losses or fluctuations in the value of the underlying asset.
A high hedge ratio means that the investor has a significant degree of protection against movements in the underlying asset, as a majority of their exposure is hedged. On the other hand, a low hedge ratio indicates that the investor retains a larger exposure to the underlying asset, implying a higher level of risk. The hedge ratio can be adjusted based on the investor's risk tolerance and desired level of protection.
Moreover, the hedge ratio is widely used in various financial markets, including commodities, foreign exchange, and derivatives. It is an essential tool for risk management, as it helps investors and companies quantify and manage their exposure to potential market volatility or fluctuations in asset prices.
Common Misspellings for HEDGE RATIO
- gedge ratio
- bedge ratio
- nedge ratio
- jedge ratio
- uedge ratio
- yedge ratio
- hwdge ratio
- hsdge ratio
- hddge ratio
- hrdge ratio
- h4dge ratio
- h3dge ratio
- hesge ratio
- hexge ratio
- hecge ratio
- hefge ratio
- herge ratio
- heege ratio
- hedfe ratio
- hedve ratio
Etymology of HEDGE RATIO
The word "hedge" comes from the Old English word "hecg" which means "a fence or boundary". It later evolved to refer to a row of bushes or trees planted close together to form a barrier or enclosure.
The term "ratio" comes from the Latin word "ratus" meaning "reckoned or calculated". In modern usage, it refers to the quantitative relationship between two or more quantities.
When combined, the term "hedge ratio" refers to the calculated or reckoned proportion of a portfolio's exposure to a particular risk that is hedged or offset by another investment or derivative. The term is commonly used in finance and investment contexts.
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