How this instrument works
A hedge ratio compares the size of an offsetting position to the size of the exposure it covers — position size divided by exposure size. A ratio of 1.0 means the position is sized one-for-one against the exposure; 0.8 means it covers four-fifths of the exposure, leaving one-fifth open to whatever price or rate the underlying exposure carries. Zero means no coverage at all, and the ratio can climb past 1.0 if the offsetting position is sized larger than the exposure itself.
Traders reach for this number in very different settings. A fuel buyer locking in jet-fuel costs with futures, a wheat exporter selling forward against a harvest still in the ground, a portfolio manager offsetting equity beta with index futures, and a treasurer covering a foreign-currency receivable are all sizing an offsetting position against an exposure the same way. What this calculator returns is the notional ratio — the plain size comparison — not a risk-minimizing figure; it assumes the covering instrument moves dollar-for-dollar with the exposure, which holds well for a matched forward but less well for a proxy position.
The notional ratio breaks down where that assumption breaks down. If the futures contract tracks a related but not identical commodity — heating-oil futures standing in for jet fuel, say — the two prices can drift apart even when position sizes match exactly, a gap traders call basis risk. Reducing that risk calls for a different number, the minimum-variance hedge ratio, built from the correlation and volatilities of the two instruments rather than their notional sizes; this page computes the simpler sizing figure those calculations start from.
- Enter Hedge position size — the notional size of the futures, forward, or offsetting position you are using.
- Enter Underlying exposure size — the notional size of the inventory, receivable, or position being covered.
- Read Hedge ratio — the fraction of the exposure the position currently covers.
- Compare the result to 1.0: below it the position under-covers the exposure, above it the position exceeds it.
- Recalculate whenever either size changes, such as at futures rollover or when inventory grows.
Worked example — an 80-unit hedge on 100 units of exposure
Take the case this instrument ships with by default: an offsetting position of 80 units against an underlying exposure of 100 units. Dividing the two gives a hedge ratio of 0.8 — the position covers eighty percent of the exposure's size, by construction, regardless of what that exposure happens to be worth.
A fuel buyer with 100,000 gallons of expected jet-fuel demand who buys futures covering 80,000 gallons is running exactly this ratio. The remaining 20,000 gallons stays exposed to spot price moves on purpose — perhaps because futures liquidity thins out that far forward, or because the buyer holds a partial view that prices will fall and wants to keep some room to benefit from being right.
Questions
What does a hedge ratio of 1.0 mean in practice?
It means the position is exactly the same notional size as the exposure — a jet-fuel buyer needing 100,000 gallons who buys futures on 100,000 gallons, for instance. Traders often call this a full or unit hedge. It does not guarantee the position is risk-free; it only means the sizes match, which is a separate question from how closely the covering instrument's price actually tracks the exposure's price.
Why would anyone deliberately hedge less than 100%?
Cost and conviction are the two usual reasons. Futures and forwards carry transaction costs, margin requirements, and sometimes basis risk, so covering the last sliver of exposure can cost more than the risk it removes. A trader with a partial view — expecting prices to move in their favor — may also leave a slice open on purpose, accepting some risk in exchange for some upside.
How does this differ from the minimum-variance hedge ratio?
This page computes the notional hedge ratio — position size divided by exposure size, nothing more. The minimum-variance hedge ratio instead uses the correlation between the covering instrument and the exposure plus the volatility of each, and it minimizes the variance of the combined position rather than matching sizes. The two figures agree only when that instrument is priced one-for-one with the exposure it covers.
Can the hedge ratio be greater than 1.0?
Yes — an offsetting position larger than the exposure it covers produces a ratio above 1.0, sometimes called an over-hedge. That can happen by design, when a trader wants the position to also carry a speculative view, or by accident, when contract sizes do not divide evenly into the exposure and rounding upward overshoots it. Either way, the combined position is now net short, or long, the residual amount.
Does a 0.8 ratio mean 80% of the risk is removed?
Only if the covering instrument moves one-for-one with the exposure's price — true for a matched forward, less true for a proxy position. When that instrument tracks a related but different asset, a 0.8 notional ratio can remove more or less than 80% of the price risk; the notional ratio measures size, and risk reduction depends on correlation as well as size.
Is hedge ratio the same as a hedge fund's leverage ratio?
No, the two share only a word. This hedge ratio measures how much of a specific exposure an offsetting position covers. A leverage ratio, by contrast, measures how much borrowed capital or notional exposure a fund carries relative to its equity, and it applies to the fund's whole book rather than a single offsetting trade.
References
Read this first: This instrument shows arithmetic, not advice. Real offers add fees, taxes and terms that vary by lender and place — verify the figures against your actual paperwork before deciding anything.