Futures hedge ratio
Definition · Level 7 · Futures & commodities
Keep reading with Tradecraft
Without a subscription, you can read three definitions every 30 days. Tradecraft explains all 988 terms and strategies, with the lessons that teach them, flashcards that come back before you forget, quizzes and a payoff lab.
The number of index futures to sell against a stock portfolio: beta × portfolio value ÷ (futures price × multiplier). It sizes the hedge so that gains on the short futures offset market losses on the stocks.
Example
$3M of stocks, beta 1.2, ES at 6,000: 1.2 × 3,000,000 ÷ 300,000 = 12 contracts to sell.
Rules and market figures change: check the current ones before relying on this.
Where Tradecraft teaches it
Level 7 · Futures & commodities, in the lesson “Hedging a stock portfolio with futures”: Sell index futures against stocks you keep, and count the contracts from the portfolio’s beta.
Related terms
- Long hedgeBuying futures to fix a price you will have to pay later: if the price rises, the futures gain what the purchase will cost extra.
- Short hedgeSelling futures to protect an asset you own, or will produce, from a price fall: if the price drops, the futures gain what the asset loses.
- BackwardationCurve shape where later-dated futures trade below nearer ones.
- BasisThe gap between the spot (cash) price and a futures price, usually spot − futures.
- Cash-and-carryA near risk-free trade (arbitrage) when a future trades above fair value: buy the asset, finance (and store) it, sell the future, and hold both to…
- Cash-settled futureA futures contract that ends with one cash payment of the gap between your price and a final reference price, with no delivery of the underlying.