What is the perfect hedge?

Perfect is an investment that balances 100% risk of other investment. In order to compensate for any risk, correlation or relative profit or loss of value between investment must be exactly the opposite. As a result, the perfect hedge is often not found.

All investments are subject to a certain amount of risk. This is the chance that the return will be less than expected for changes in market value; The investment exposed to the full risk of the market is said to be in a naked position. Investments to secure are carried out to compensate or cover this position and help ensure at least acceptable return. The loss of the investment would be compensated by the profit of the value for its securing.

The ideal would be a perfect hedge and eliminate all risk, but in fact it is usually possible to only partial coverage of exposure or risk. The intention of such an investment strategy is to reduce possible losses and not increase revenues. When they were secured, profits made from the Acclzady investment Budofor the cost of a hedge.

High -risk investments usually offer high yields to attract investors, and securing is often used to ensure high -risk investment safer and sacrifice part of potential profits. However, the costs for the investor may be too high to ensure the perfect hedge. Expected profits may be excluded or reduced to an unacceptably low level of hedge costs.

correlation is a measure of a relative change in value between two securities; It is represented as a scale of values ​​ranging from +1 to -1. The value, the correlation coefficient +1 suggests that the market values ​​of two securities are perfectly aligned and change as one. The inverse relationship is marked with a coefficient of -1. In this case, market forces causing a change in the value of one security should precisely the opposite effect of comparable safety.

for creatingThe perfect hedge must be a correlation coefficient of two securities -1. This condition is a very rare occurrence, because most securities pairs have coefficients that are clustered around 0, suggesting that the relative change of value between them is accidental. Since the correlation coefficient between two securities is approaching -1, the effectiveness of the use of one security as a securing against the performance of the other increases.

Finding perfect security and securing investment is generally advanced investment strategies that are usually used only by professional fund managers to alleviate short -term risk. Most individual investors are not involved in this practice. Those who invest in the long term are aware of the return because the value of their investment is increasing with the total market value. Short -term fluctuations are considered unnecessary costs that reduce any income.