Question

A perfect hedge (full coverage) on translation exposure can usually be achieved when which of the following occurs? a. Using a forward hedge. b. Using a money market hedge. c. Using a futures hedge. d. All of the above would work to accomplish this purpose. e. None of the above, because a perfect hedge does not exist.

Answer 1

Answer:

e). None of the above, because a perfect hedge does not exist

A perfect hedge is nearly impossible

Explanation:

A perfect hedge is a position undertaken by an investor that would eliminate the risk of an existing position, or a position that eliminates all market risk from a portfolio. In order to be a perfect hedge, a position would need to have a 100% inverse correlation to the initial position.

At the time of taking an opposite position in Derivatives Market, Perfect Hedge would mean covering the risk involved in the Cash Market Position completely, i.e. 100%. 2. Imperfect Hedge: When the position in the cash market is not completely hedged or not hedged to 100%, then such a hedge is called Imperfect Hedge.