What does Selling Hedge mean?
A hedging strategy that involves taking up a short futures position. This strategy intends to provide protection against a decline in the value of an asset. Investors also use this strategy to make profit in falling market.
Futures Knowledge Explains Selling Hedge
If the price of the underlying asset does subsequently decline, the value of the short futures would increase. The drop in revenue from the sale of the underlying is likely to be offset by the gain in the value of the short futures position. A producer uses this strategy to hedge against possible decrease in prices of its output. It is also known as output hedge or short hedge. For example in a situation of falling crude oil price, an oil company may sell the short hedge to lock in the price of crude oil and protect against future price volatility.
Investors also take a short position in futures contracts in commodities whose prices are likely to decline and earn profit or when the market is bearish. For example, in July 2015, hedge funds and other speculators shifted to a net-short position (bearish) in Gold for the first time in the history, as per the record maintained by the U.S. government since 2006.