Currency hedge ratio

A hedge ratio states how much foreign-currency exposure has been neutralised. A sterling investor with 800 of US dollar assets and 600 of dollar forwards sold has a 75% hedge ratio. The unhedged 25% remains exposed to the exchange rate.

Policies usually set a target with a tolerance, such as a 75% hedge with a floor of 70%. The ratio drifts as asset values move and forwards approach maturity. Policies should also say which exposures count, for example whether a dollar-priced fund holding European shares is dollar or euro exposure.

Acclimetry’s currency hedge ratio divides the absolute hedge exposure by the underlying exposure in the same currency. Example: a 400 forward against 800 of dollar assets hedges 50%, a breach of a 70% floor. With no underlying exposure in the currency, the result is not applicable, never a pass.