Dynamic Hedge Ratio refers to a continuously adjusted proportion of a hedging instrument required to offset the price risk of an underlying asset. It is particularly relevant in managing exposure within volatile crypto markets and institutional options trading, adapting to changing market conditions in real time.
Mechanism
The ratio is computed using current market data, frequently derived from option Greek parameters like Delta, which measures the sensitivity of an option’s price to changes in the underlying asset’s price. As market conditions, asset prices, and implied volatility fluctuate, the ratio is algorithmically recalculated, necessitating frequent rebalancing of the hedge position.
Methodology
Implementation involves continuous monitoring of relevant market parameters and automated execution of trades to maintain the desired hedge. This strategy aims to keep a neutral or targeted risk exposure against price fluctuations, thereby minimizing potential losses from adverse market movements while optimizing capital efficiency in digital asset portfolios.
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