Hedge Ratio Calculator (hedged share of an exposure & net result of a price move)

Understanding the hedge ratio calculator — concept and principle

This calculator finds the hedge ratio, the size of a hedge relative to the exposure it protects, and tests what happens for a given price move. It shows the gain or loss on the exposure and on the hedge, the net result, the share left unhedged and how much hedge to add or remove to reach a target ratio. Use it for currency, commodity and equity hedging decisions and risk management courses.

Hedging 70% of the exposure turns a $50,000 loss into $15,000.

How it is calculated

Hedge ratio = value of the hedge position ÷ value of the exposure.
Exposure result = exposure × price move.
Hedge result = −hedge value × price move × effectiveness (the hedge moves the other way).
Net result = exposure result + hedge result.
Unhedged share = 1 − hedge ratio.
Change to reach target = target ratio × exposure − hedge value.

The principle

A hedge is a position that gains when your exposure loses. With a ratio of 1, the whole exposure is covered and price moves largely cancel out; with 0.7, 70% is protected and 30% still moves with the market. Effectiveness below 100% represents basis risk: the hedge instrument does not track the exposure perfectly, for example a futures contract on a related but different commodity. Choosing less than a full hedge keeps some upside while reducing downside.

Worked example

Default inputs: exposure $500,000, hedge $350,000, price move −10%, effectiveness 100%, target ratio 1.

Hedge ratio = 350,000 ÷ 500,000 = 0.7.
Exposure result = 500,000 × (−10%) = −$50,000.
Hedge result = +350,000 × 10% = +$35,000.
Net result = −50,000 + 35,000 = −$15,000; 30% is unhedged.
To reach a ratio of 1, add 1 × 500,000 − 350,000 = $150,000 of hedge.

Each point is the calculator re-run with only “Value of the position to protect (exposure)” changed; the gold point is the default example. Change the inputs above and this chart follows your numbers.

Value of the position to protect (exposure)	Hedge ratio
125,000	2.8
250,000	1.4
375,000	0.93
500,000	0.7
625,000	0.56
750,000	0.47
1e+06	0.35

How to read the result

The net result shows the loss you still bear for the tested move; it equals the unhedged share times the exposure move when effectiveness is 100%. Try a positive price move to see the cost of hedging: the hedge loses and offsets part of your gain. Lower effectiveness leaves a residual loss even with a full hedge.

Common mistakes

Hedging the wrong direction (buying when you should sell the hedge).
Ignoring basis risk when the hedge instrument differs from the exposure.
Over-hedging, which turns a hedge into a speculative position.
Forgetting margin calls and costs on derivative hedges.

Keep in mind: Real hedges involve costs, margin, timing differences and imperfect correlation. To size a hedge from volatilities and correlation, use an optimal hedge ratio method. This is not financial advice.

Frequently asked questions

What is a hedge ratio of 1?

The hedge is the same size as the exposure, so the whole position is covered.

Why not always hedge 100%?

A full hedge also removes gains, and costs or basis risk may make a partial hedge better.

What is basis risk?

The risk that the hedge and the exposure do not move exactly together.

Sources: Hedge ratio = size of hedge ÷ size of exposure (standard derivatives definition; e.g. J. C. Hull, Options, Futures, and Other Derivatives, 10th ed., Pearson, 2018, ch. 3)

Checked 9 Nov 2026. Hedge ratio = size of the hedge position ÷ size of the exposure; offsetting gain/loss of a short hedge: standard derivatives definitions.

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