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What is the superhedging price?

Superhedging price

Like hedging, superhedging is all about managing risk. It describes the smallest price that can be paid for a hedged portfolio with certain constraints whose value will be greater or at least equal to a portfolio without constraints at a specified time in the future.

Where have you heard about the superhedging price?

The concept of superhedging has been studied by economists and academics but, in reality, it’s extremely difficult to put into practice.

What you need to know about the superhedging price.

In incomplete markets, such as options, it’s impossible to stamp out all risk. But in theory you can superhedge, meaning you can build a portfolio that has a positive pay-off whatever happens in the market.

You could potentially superhedge a short call position by buying one of the stock and never rebalancing, but it might give you prices that differ vastly from the market.

The aim is to come up with a superhedging strategy that succeeds in constructing a portfolio with the least amount of risk for the best return.

Find out more about the superhedging price.

Read our definitions of hedging for a further insight into managing investment risk.

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