Perfect Hedge

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DEFINITION of 'Perfect Hedge'

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.

INVESTOPEDIA EXPLAINS 'Perfect Hedge'

A common example of a near-perfect hedge would be an investor using a combination of held stock and opposing options positions to self-insure against any loss in the stock position. The cost of this strategy is that it also limits the upside potential of the stock position.

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    Hedging involves taking an offsetting position in a derivative in order to balance any gains and losses to the underlying ... Read Full Answer >>
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