What is normed hedge ratio in SAP FS-BA-PM-HP - Hedge Processes?

SAP Term: normed hedge ratio

• Component: FS-BA-PM-HP

• Component Name: Hedge Processes

• Description: Value between 0 and 100, that expresses the hedge ratio as a percentage. The normed hedge ratio is calculated from the hedge ratio as follows: If the hedge ratio is between 0 and -1: Absolute amount x 100 If the hedge ratio is less than -1: Inverse of the absolute amount x 100 If the hedge ratio is greater than 0: Zero &EXAMPLE& A perfect hedge has a normed hedge ratio of 100%. If the changes in the value of the underlying and hedge transactions in a hedging relationship are in the same direction, then the hedging relationship has a normed hedge ratio of 0%.

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• Key Concepts: 
  Normed hedge ratio is a term used in the SAP FS-BA-PM-HP Hedge Processes component. It is a ratio that is used to determine the amount of hedging that should be done in order to minimize risk and maximize profits. The normed hedge ratio is calculated by dividing the expected future cash flows of a hedging instrument by the expected future cash flows of the underlying asset. 
  
  How to use it: 
  The normed hedge ratio can be used to determine the optimal amount of hedging that should be done for a particular asset. This ratio can be used to compare different hedging instruments and determine which one will provide the most benefit. It can also be used to determine the amount of hedging that should be done for a particular asset in order to minimize risk and maximize profits. 
  
  Tips & Tricks: 
  When calculating the normed hedge ratio, it is important to consider all of the factors that could affect the future cash flows of both the hedging instrument and the underlying asset. This includes factors such as market conditions, interest rates, and other economic factors. Additionally, it is important to consider any fees or costs associated with using a particular hedging instrument. 
  
  Related Information: 
  The normed hedge ratio is just one of many tools that can be used to manage risk and maximize profits when investing in financial markets. Other tools include delta hedging, gamma hedging, and volatility hedging. Additionally, there are various strategies that can be employed when using these tools, such as dynamic hedging and static hedging.