A hedge that involves taking positions in a group of instruments in an attempt to earn a riskless return on funds invested, regardless of the individual performances of the positions’ components. In other words, a neutral hedge can be established by combining market risk-offsetting positions in related instruments and other types of instruments in such a way that the investment will generate a risk-free interest rate when the underlying price moves in either direction.
This hedge neutralizes the risks of individual components.
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