What is a 'Perfect Hedge'

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.

BREAKING DOWN '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.

  1. Cross Hedge

    A cross hedge is used to manage risk by investing in two positively ...
  2. Natural Hedge

    A natural hedge is the reduction in risk that can arise from ...
  3. Double Hedging

    Hedging a position by using futures and options, thereby doubling ...
  4. Basis Risk

    Basis risk is the risk that offsetting investments in a hedging ...
  5. Legacy Hedge

    A hedge position that a company holds for an extended period ...
  6. Anticipatory Hedge

    A hedge position taken in anticipation of a future buy or sell ...
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  3. What is the difference between hedging and speculation?

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  4. Do hedge funds manipulate stock prices?

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