Why Is Perfect Convergence Critical for a Perfect Hedge?
Perfect convergence is critical for a perfect hedge because a perfect hedge requires that the loss or gain on the spot position is exactly and completely offset by the gain or loss on the futures position. If the basis does not converge perfectly to zero at the time the hedge is lifted, the resulting basis risk means the offset is imperfect, leaving the hedger with an unexpected residual profit or loss.
Glossar
Residual Profit
Valuation ⎊ Residual profit, within cryptocurrency options and derivative markets, represents the portion of an option’s intrinsic value not immediately captured by the current market price, often arising from complex volatility surfaces or illiquidity premiums.
Basis Risk
Exposure ⎊ The core of basis risk within cryptocurrency derivatives, particularly options, stems from the imperfect correlation between the price movements of the underlying asset and its derivative contract.
Perfect Convergence
Equilibrium ⎊ Perfect Convergence, within cryptocurrency derivatives, signifies a state where theoretical pricing models, reflecting arbitrage-free conditions, align precisely with observed market prices across multiple exchanges and related instruments.
Convergence
Equilibrium ⎊ Convergence, within cryptocurrency, options, and derivatives, signifies a state where market prices across different exchanges or related instruments align, reflecting efficient information dissemination and reduced arbitrage opportunities.
Perfect Hedge
Calibration ⎊ A perfect hedge, within cryptocurrency derivatives, represents a dynamic positioning strategy aiming for zero delta sensitivity to underlying asset price movements.
Correlation Coefficient
Statistical Linkage ⎊ Correlation Coefficient measures the linear statistical relationship between the price movements of two different crypto assets or between an asset and its derivative.