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Calculating an FX Forward Hedge Ratio as Portfolio Value Changes

Article Quant Q&A · Author: junior_pm
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Summary

The document poses a practical question about measuring a foreign-exchange forward hedge when the value of the underlying portfolio holding changes. It describes a USD exposure that is intended to be converted into EUR in one month and a forward contract sized to the initial USD amount. After the holding’s value declines, it asks whether the hedge ratio should be recalculated as current exposure divided by the original forward notional.

No answer, formula, or treatment of contract valuation is provided, so this is an unresolved sizing question rather than a complete hedging method. A rigorous calculation would need to specify the exposure measure, the forward’s currency notional and direction, and whether the ratio is measured against current market value or a target amount at the hedge horizon. The example alone does not establish how to rebalance or account for exchange-rate changes.

Key ideas

  • The question concerns how a portfolio value change affects the measured size of an FX forward hedge.
  • A forward sized to the initial exposure may no longer match the holding’s current value.
  • The document does not provide a formula or answer for recalculating the hedge ratio.
  • A precise ratio depends on exposure definition, forward direction, and the time at which the hedge is measured.

Tags

ForexRisk managementPosition sizing
Full text
# How do I calculate FX forward hedge ratio?


# How do I calculate FX forward hedge ratio?












Suppose I have a USD holding of 1,000,000 in my portfolio and I want to convert it into EUR in a month's time. I enter into a FX forward contract of the same amount USD 1,000,000, meaning that I have a hedge ratio of 100%. If the portfolio holding is now worth $990,000, is my hedge ratio 990,000/1,000,000?

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.