hedge ratio investment & finance definition

The ratio of the value of futures contracts to the value of the cash commodity whose value the trader is attempting to protect by using a hedge. The ratio is calculated to make certain that there are enough futures contracts to provide financial protection in the event that the price of the cash commodity either rises or falls. Hedge ratios are calculated for options using the option’s delta (rate of change between the option price and the underlying price of the stock or futures contract). For example, a hedge ratio of 4 (4 options for each futures contract) would be needed if a $1/barrel change in the underlying futures price led to a 25 cent per barrel change in the options premium.