Business and Personal Finance Dictionary

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• HEDGE RATIO
  
  1. Ratio of the value of futures contracts purchased or sold to the value of the cash commodity being hedged, a computation necessary to minimize basis risk. 2. The ratio, determined by an option’s delta, of futures to options required to establish a risk-free position. For example, if a $1/barrel change in the underlying futures price leads to a $0.25/barrel change in the options premium, the hedge ratio is four (four options for each futures contract).
  
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