Calculator Inputs
Example Data Table
| Pair | Exposure Type | Exposure | Spot | Forward | Spot Vol % | Hedge Vol % | Correlation | Coverage % | Min Ratio | Adj Ratio | Contracts | Variance Reduction % | Effective Rate | Est. Cost |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| EUR/USD | Receivable | 500,000 | 1.0800 | 1.0950 | 9.00 | 7.00 | 0.82 | 90.00 | 1.0543 | 0.9489 | 4 | 66.57 | 1.0963 | 779.25 |
This example uses a foreign receivable, a positive correlation, and a 90% coverage target to show how the hedge ratio affects contracts and residual risk.
Formula Used
h* = ρ × (σs / σf)
hadj = h* × Coverage Target
Hedged Amount = Exposure × hadj
Contracts = |Hedged Amount / Contract Size|
Var(Hedged) = [σs² + h²σf² − 2hρσsσf] × (Exposure × Spot)²
Reduction % = [1 − Hedged Variance / Unhedged Variance] × 100
Here, ρ is correlation, σs is exposure volatility, σf is hedge instrument volatility, and h is the applied hedge ratio.
How to Use This Calculator
- Enter the currency pair and choose whether the position is a foreign receivable or payable.
- Input the foreign currency exposure and the current spot rate.
- Provide the forward hedge rate and your expected settlement rate.
- Enter exposure volatility, hedge instrument volatility, and correlation.
- Set a coverage target, contract size, and transaction cost assumption.
- Press the calculate button to view hedge ratios, contract counts, variance reduction, projected protected value, and the risk graph.
FAQs
1) What does the FX hedge ratio show?
It shows how much of the currency exposure should be hedged with a forward or similar instrument to reduce volatility under the assumptions entered.
2) Why can the hedge ratio exceed 100%?
A ratio above 1 can appear when exposure volatility is high relative to hedge volatility and correlation is strong. It may indicate an overhedge, so treasury policy should still guide execution.
3) What effect does correlation have?
Higher positive correlation usually improves hedge efficiency because the hedge instrument tracks the exposure more closely. Weak or negative correlation reduces the hedge’s stabilizing effect.
4) Why is a coverage target included?
Some firms do not hedge the full optimal ratio. The coverage target lets you scale the mathematical ratio to match policy limits, liquidity preferences, or commercial flexibility.
5) What is the difference between spot and hedge volatility?
Spot volatility reflects the exposure’s exchange-rate risk. Hedge volatility reflects the instrument used for protection. Their relative size directly influences the minimum-variance hedge ratio.
6) Why does contract size matter?
Contract size determines how precisely the calculated hedge amount can be implemented. Large contract sizes can force rounding and leave some exposure unhedged or slightly overhedged.
7) Does the calculator include hedge cost?
Yes. It estimates transaction cost using the hedged domestic value and the percentage cost assumption you enter. It does not include credit charges or optionality premiums.
8) How should I judge a strong hedge result?
Look for meaningful variance reduction, acceptable transaction cost, manageable contract rounding, and an adjusted ratio that fits policy. The best hedge is efficient, practical, and consistent.