Compute the minimum-variance hedge ratio from correlation and volatilities.
Please do not make financial decisions based on these results.
What is the Optimal Hedge Ratio Calculator?
Compute the minimum-variance hedge ratio from correlation and volatilities. To use the Optimal Hedge Ratio Calculator, enter correlation, spot volatility, futures volatility, exposure, contract value; it returns optimal hedge ratio, contracts needed, and shows them instantly as you type.
Where the Optimal Hedge Ratio Calculator fits
Compute the minimum-variance hedge ratio from correlation and volatilities. The main figure it returns is the Optimal hedge ratio, worked out from the values you enter.
It belongs with the other investment tools. If you are comparing options or checking a result from another angle, try the Hedge Ratio Calculator, Expense Ratio Calculator or the Information Ratio Calculator.
How to use the Optimal Hedge Ratio Calculator
- Enter your numbers. Start with Correlation, Spot volatility (%), Futures volatility (%), then fill in Exposure ($), Contract value ($). Use a rate of return you consider realistic; small changes compound into large differences. Fields marked optional can stay at zero.
- Read the result. The highlighted box gives the Optimal hedge ratio, and the cards below show Contracts needed. Tables and charts break it down further.
- Test other scenarios. Results update as you type. Change one value at a time to see what drives the answer, and press Reset to go back to the defaults.
Formula and how it works
Example with real numbers
Here is the Optimal Hedge Ratio Calculator using the default values shown in the calculator above:
Inputs
| Correlation | 0.9 |
|---|---|
| Spot volatility (%) | 20 |
| Futures volatility (%) | 18 |
| Exposure ($) | 1,000,000 |
| Contract value ($) | 125,000 |
Results
| Optimal hedge ratio | 1 |
|---|---|
| Contracts needed | 8 |
With these inputs the calculator returns Optimal hedge ratio: 1. Change any value in the calculator to see how the result moves.
What if you change one input?
Sensitivity check: raising Correlation from 0.9 to 1.08 (about 20% higher) and leaving everything else as in the example above changes the results like this:
| Result | Example | After the change | Change |
|---|---|---|---|
| Optimal hedge ratio | 1 | 1.2 | +20% |
| Contracts needed | 8 | 9.6 | +20% |
The input that moves the result most is the one to check twice. Change it in the calculator above to test your own case.
What the results tell you
The results panel of the Optimal Hedge Ratio Calculator reports Optimal hedge ratio and contracts needed. Compare these figures while changing one input at a time, and use the related calculators below to look at the same situation from another angle.
Method and limits. This calculator applies the formula in the section above to your inputs, in your browser; nothing you enter is stored on our servers. Investment returns are not guaranteed. The result shows what the numbers you enter would produce, not what the market will do. It is for information, not financial, tax or legal advice.
Frequently asked questions
What does the optimal ratio minimize?
The variance of the combined hedged position.
Are investment returns guaranteed?
No. Real returns vary. Use these tools to compare scenarios, not to predict results.
What rate of return should I assume?
There is no guaranteed rate. Test a range of conservative and optimistic rates, and remember that fees and inflation reduce your real return.
Are the results guaranteed?
No. Results depend entirely on the numbers you enter and the formulas shown on this page. Please do not make financial decisions based on them alone; confirm important figures with a licensed professional.
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