A forward contact to buy US$450 000 for a planned purchase transaction of US$600 000 has a hedge ratio of:
A) 25%.
B) 75%.
C) 15%.
D) 133%.

Question

Quizplus · Accepted Answer

The hedge ratio is calculated as the notional amount of the forward contract divided by the total value of the underlying exposure. In this case, the notional amount of the forward contract is US$450 000, and the total value of the underlying exposure (i.e. the planned purchase transaction) is US$600 000. Therefore, the hedge ratio is 450 000 / 600 000 = 0.75, or 75%. So, the best choice is B.

A Forward Contact to Buy US$450 000 for a Planned