Work out currency hedge ratio instantly with clear inputs, formula shown and shareable results.
The minimum variance hedge ratio is the correlation times the ratio of volatilities, which is the regression slope of exposure on hedge returns. Because correlation is below one, some residual risk always remains — that is basis risk.
Minimum variance hedge
h* = ρ × σ_exposure / σ_hedge; variance removed = ρ²
Figures are estimates based on the inputs given. Bank charges, regulatory minima and market rates change and differ between institutions and jurisdictions. This is not financial advice — confirm with your bank or treasury policy.
Because the hedge instrument is not identical to the exposure. A one-for-one hedge can add risk when volatilities differ.
The residual left after hedging, driven by the imperfect correlation between the hedge and the exposure.