When the net profit on both the futures and cash position equals zero, this is known as a(n):
A) cross hedge.
B) perfect hedge.
C) imperfect hedge.
D) basis hedge.
E) return hedge.

Question

Quizplus · Accepted Answer

A perfect hedge is when the net profit on both the futures and cash position equals zero, meaning that any losses on one position are offset by gains on the other position. This is the goal of hedgers who use futures contracts to protect against price fluctuations in the underlying asset. A cross hedge refers to hedging with a futures contract that is not an exact match for the underlying asset being hedged, while an imperfect hedge refers to a hedge that does not completely eliminate the risk being hedged against. A basis hedge is a type of hedge that involves taking a position in the futures market to offset changes in the price basis of the underlying asset, and a return hedge is not a commonly used term in finance or investing.

When the Net Profit on Both the Futures and Cash