Financial Terms
Perfect hedge

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Definition of Perfect hedge

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Perfect hedge

A financial result in which the profit and loss from the underlying asset and the hedge position
are equal.

Related Terms:

Additional hedge

A protection against borrower fallout risk in the mortgage pipeline.

Capital market imperfections view

The view that issuing debt is generally valuable but that the firm's
optimal choice of capital structure is a dynamic process that involves the other views of capital structure (net
corporate/personal tax, agency cost, bankruptcy cost, and pecking order), which result from considerations of
asymmetric information, asymmetric taxes, and transaction costs.

Covered or hedge option strategies

Strategies that involve a position in an option as well as a position in the
underlying stock, designed so that one position will help offset any unfavorable price movement in the other,
including covered call writing and protective put buying. Related: naked strategies

Delta hedge

A dynamic hedging strategy using options with continuous adjustment of the number of options
used, as a function of the delta of the option.

Expected value of perfect information

The expected value if the future uncertain outcomes could be known
minus the expected value with no additional information.


A transaction that reduces the risk of an investment.

Hedge fund

A fund that may employ a variety of techniques to enhance returns, such as both buying and
shorting stocks based on a valuation model.

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Hedge ratio (delta)

The ratio of volatility of the portfolio to be hedged and the return of the volatility of the
hedging instrument.

Hedged portfolio

A portfolio consisting of the long position in the stock and the short position in the call
option, so as to be riskless and produce a return that equals the risk-free interest rate.

Long hedge

The purchase of a futures contract(s) in anticipation of actual purchases in the cash market. Used
by processors or exporters as protection against an advance in the cash price. Related: hedge, short hedge

Money market hedge

The use of borrowing and lending transactions in foreign currencies to lock in the
home currency value of a foreign currency transaction.

Perfect capital market

A market in which there are never any arbitrage opportunities.

Perfect competition

An idealized market environment in which every market participant is too small to affect
the market price by acting on its own.

Perfect market view (of capital structure)

Analysis of a firm's capital structure decision, which shows the
irrelevance of capital structure in a perfect capital market.

Perfect market view (of dividend policy)

Analysis of a decision on dividend policy, in a perfect capital
market environment, that shows the irrelevance of dividend policy in a perfect capital market.

Perfectly competitive financial markets

Markets in which no trader has the power to change the price of
goods or services. perfect capital markets are characterized by the following conditions: 1) trading is costless,
and access to the financial markets is free, 2) information about borrowing and lending opportunities is freely
available, 3) there are many traders, and no single trader can have a significant impact on market prices.

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Perfected first lien

A first lien that is duly recorded with the cognizant governmental body so that the lender
will be able to act on it should the borrower default.

Sell hedge

Related: short hedge.

Short hedge

The sale of a futures contract(s) to eliminate or lessen the possible decline in value ownership of
an approximately equal amount of the actual financial instrument or physical commodity.
Related: Long hedge.

perfection standard

see ideal standard


A securities transaction that reduces or offsets the risk on an existing
investment position.

Hedge inventory

Excess inventories kept on hand as a buffer against contingent







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