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Published On: Mon, Feb 18th, 2013

Perfect Hedge

A Perfect Hedge refers to a series of positions taken by a trader in which to sum of the positions equate to a combined Beta of 0.0.

A Perfect Hedge can also be achieved in a trader’s book by each directional trade (long or short) being offset by a corresponding and inversely correlated opposite directional trade.  In this case each trade need not be offset by the identical type of investment product.  For example, a position of long 100 shares of a stock can be offset by buying a Put Options contract of the same security.  This will create a perfect hedge in a way that the long equity position will gain when the stock rises in value, but at the same time the option will be losing in value by a corresponding amount.  A Perfect Hedge can be used to lock in the gains of a position while limiting losses at the same time.

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.

 

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