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Buying Hedge

What does Buying Hedge mean?

A purchase of a futures contract to hedge against possible increases in the prices of underlying asset. It is also called long hedge. Buying Hedge is done with the intention of accepting delivery of the underlying asset. A manufacturer may buy a futures contract in order to be able to buy the main raw material (commodity) at a fixed price later. Here the manufacturer controls manufacturing costs against price fluctuations

Futures Knowledge Explains Buying Hedge

Buying hedge is an effective way to dealing with a volatile markets. Take the example of crude oil which is the main input for refineries. Oil price which was at its six year low at $45 a barrel in January is moving upward and is trading near $70 in May. A refinery may purchase futures for next six months in order to lock in a price for crude oil for the required quantities it must buy in the future. A long hedge protects the refinery from oil price rise.

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