Never miss an important update

Click    to get notified about important updates only.   

99 push-notification-bg

99 Alternatives

We are sorry that you have opted out.

However, if you accidentally selected "Block" or you want to receive notifications in the future, then follow any of the following instructions.

Option 1

99 chrome-b-n

Option 2

1. visit to Chrome > Settings > Content Settings

2. click here Content Settings > Notifications > Manage Exceptions

OR

Copy & Paste in Addrsss Bar > "chrome://settings/content/notifications?search=notif"

3. Select Allow for https://www.99alternatives.com/

4. Refresh the page.

99 Alternatives

Opportunities are Infinite

Please wait
99 Alternative logo
Business
All Categories

Investors Space-Spreading Awareness

Join a community that's informative, communicative & Interactive

99 Alternatives-Taking Initiative

99 top-hearder-guide-book
Register Today to Download Your Free
Alternative Asset Guide for 2022
Worth £49.99 and Free Life Time
Subscription to 99 Alternatives Web Portal
Worth £100's Limited Availability…
register for e Asset Guide
Latest News
Japan and Britain aim for trade deal by end-July, Tokyo negotiator says
Bolsonaro extends aid to Brazilians as jobs plummet, public debt soars
Ryanair expects to fly 4.5 million passengers in July
European exchanges oppose shorter stock trading day sought by London firms
TransferWise granted permission to offer investment services in UK
Lloyd's calls for state-backed 'Black Swan' reinsurance
Scam Alerts
UK Government To Make Big Tech Firms And Banks Liable To Pay For Losses In Online Frauds
Millions Are Lost in Cryptocurrency Frauds Each Year
Loss In Terms Of Monetary Value Through Scam Victims’ Wellbeing Was £9.3bn/ Year
Emergency Number 159 Was Launched To Report Scams
71 Per Cent Growth In Frauds In the UK During the Pandemic
Nationwide Recommends Delaying Risky Fund Transfers To Restrict Frauds
Platinum-Trading-Academy_728x9099 Ads

Investment Terminology

hedge funds

HEDGE FUNDS
Investor leads

hedge ratio

Share:

Over the last few years, an increase in availability and use of derivative securities allowed agents to face price risk to lower exposure. The simplest methods to lower it, is hedging with futures contracts. The ratio of the number of units of future assets that are purchased relative to the number of units of spot asset – is called the hedge ratio.

This ratio is significant, in term of, calculation of volatility of portfolio returns and is used to minimize the variance of the returns of a portfolio containing spot and futures - that is called the optimal hedge ratio.

One can hedge investment portfolio asset allocation where the hedge ratio is determined by the size of the futures contracts relative to the cash transactions. Long and short hedges can be used for downside and upside risks.

  • Short is used for future contracts and is applied in the condition when one wants to sell the asset in future.
  • Long is an appropriate hedge in the case, one wants to buy an asset in future.

Such strategies are often not straightforward and there can be many conditions like

  • The asset to be hedged might not be the same as the underlying future contract, in terms of, quality, weight, size, structure and other physical factors.
  • The hedger may not be certain of when the asset will be bought or sold.
  • Basis risk for such recommendations is determined by the cash money of the asset and the future rates.

If the hedged item is same as the underlying commodity in a futures contract, the cash and future rate will be identical or replicas, but there can be conditions when the strategy is not exactly a replication. In such cases, cross hedging can be employed.

Basis risk prevents replica where it is not considered optimal to cross hedge to the hedge ratio that equals 1.0.

Date Published: Aug 29, 2020

Related Frequently Asked Questions

Natex_728x9099 Ads
300x25099 Ads

Copyright © 2022 99alternatives Ltd.   All rights reserved.

Designed and Managed by Mont Digital