As per Reading 58 of the CFA Level 1 Curriculum Book of Derivatives;
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How does a position in the underlying combined with an opposite position in the derivative create a perfect hedge i.e. how does it eliminate risk?
If you have a long position in the underlying and a short position in a derivative, then when the underlying increases in value your long position increases dollar-for-dollar and your short position decreases dollar-for-dollar, and when the underlying decreases in value your long position decreases dollar-for-dollar and your short position increases dollar-for-dollar.
Similarly when you have a short position in the underlying and a long position in a derivative.