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What is a Perfect Hedge, what are the conditions necessary for a Hedge to be Perfect?

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posted Jul 4 by Pratiksha Shetty

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A perfect hedge is a position undertaken by an investor that would eliminate the risk of an existing position, or a position that eliminates all market risk from a portfolio. In order to be a perfect hedge, a position would need to have a 100% inverse correlation to the initial position. As such, the perfect hedge is rarely found.

The conditions that must hold if we are to ensure that the hedge is Perfect are following:-
1. The date on which the hedge wishes to buy os sell the underlying asset must coincide with the date on which the futures contract being used is scheduled to expire.
2. The number of units of the underlaying asset, which is spught to be bought or sold by the header, must be an integer multiple of the size of the futures contract.
3. Futures contracts must be available on the commodity which the header is seeking to buy or to sell.

answer Jul 4 by Vijay
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