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What is a Buying Hedge?

Hedging against future price risk was the main reason Futures contracts came into being.

If an investor or a business knows that they need to acquire an asset or security at a future date, they might go ahead and agree to a price and have it in writing on a Futures contract. A futures contract means that an item has been sold at a stated price, and only awaits settlement at a future date.

This will protect them from the risk that the price will move unfavorably in the future, and it will allow them to balance books and plan a budget with more certainty. Futures contracts are standardized and traded on exchanges.

Another instrument that offers a buying hedge is a Forward contract. Forwards are essentially the same thing but they are negotiated individually and trade over-the-counter instead of on exchanges.

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Keywords: commodities, hedging, exchanges, Futures, over-the-counter (OTC), forward contracts, price risk,