Definition
Hedge Ratio
The hedge ratio is the proportion of a position that must be offset to neutralise risk, often equal to the option's delta.
To hedge an option position against price moves, you offset it with the underlying or futures in proportion to its delta — that proportion is the hedge ratio. An option with a delta of 0.4 needs 0.4 units of the underlying per option to be delta-neutral.
NSE option desks recompute the hedge ratio constantly because delta changes with price (gamma) and time (charm), so a delta-neutral book must be re-hedged as markets move. For portfolio hedgers, the hedge ratio also determines how many index futures or puts are needed to protect a given equity exposure.
Related terms
- DeltaDelta measures how much an option's premium changes for a ₹1 move in the underlying stock or index.
- GammaGamma measures how fast an option's delta changes as the underlying moves — the rate of change of delta.
- HedgingHedging is taking an offsetting position to protect a portfolio against adverse price moves, like insurance for your investments.
- BetaBeta measures how much a stock tends to move relative to the overall market.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.