Why/How would the overall profit/loss of a hedge portfolio be close to 0 at maturity?
Why/How would the overall profit/loss of a hedge portfolio be close to 0 at maturity?
Homework Answers
In a hedge portfolio, the position in the derivative market is always opposite to the underlying position. For example if we have a payable of 10,000 euro in three months, then we can buy 10,000 Euro futures contract maturing in three months. So after three months the difference, the future price would converge to the spot price and the gain or loss in the future contract would get nullified by the opposite position in the spot market.
So, the net profit or loss = Gain or loss in future contract minus Gain or loss in Spot market (equal and opposite). Thus the net profit or loss becomes ZERO
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Why/How would the overall profit/loss of a hedge portfolio be close to 0 at maturity?
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