What Is a Perfect Hedge?
A perfect hedge is a theoretical strategy that completely eliminates all risk of loss from an existing position. It involves taking an offsetting derivative position of equal size and maturity to the underlying crypto holding.
In practice, a perfect hedge is difficult to achieve due to factors like basis risk, transaction costs, and the inability to find perfectly matching derivative contracts.
Glossar
Transaction Costs
Expense ⎊ Transaction costs represent the total expenses incurred when executing a trade or interacting with a financial protocol on a blockchain.
Theoretical Strategy
Algorithm ⎊ This refers to a trading plan derived from mathematical principles, such as Black-Scholes or advanced stochastic calculus models, applied to derivative pricing and risk parity.
Perfect Hedge
Calibration ⎊ A perfect hedge, within cryptocurrency derivatives, represents a dynamic positioning strategy aiming for zero delta sensitivity to underlying asset price movements.