Long hedge
Definition · Level 7 · Futures & commodities
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Buying futures to fix a price you will have to pay later: if the price rises, the futures gain what the purchase will cost extra.
Example
An airline buys crude oil futures to lock in its fuel bill.
Where Tradecraft teaches it
Level 7 · Futures & commodities, in the lesson “Hedging a stock portfolio with futures”: Sell index futures against stocks you keep, and count the contracts from the portfolio’s beta.
Related terms
- Futures hedge ratioThe number of index futures to sell against a stock portfolio: beta × portfolio value ÷ (futures price × multiplier).
- Short hedgeSelling futures to protect an asset you own, or will produce, from a price fall: if the price drops, the futures gain what the asset loses.
- BackwardationCurve shape where later-dated futures trade below nearer ones.
- BasisThe gap between the spot (cash) price and a futures price, usually spot − futures.
- Cash-and-carryA near risk-free trade (arbitrage) when a future trades above fair value: buy the asset, finance (and store) it, sell the future, and hold both to…
- Cash-settled futureA futures contract that ends with one cash payment of the gap between your price and a final reference price, with no delivery of the underlying.