Hedging involves taking an opposite position in the futures market from one's position in the physical market in order to reduce risks from price changes. It is a two-step process where gains or losses from price changes in one market are offset by opposite changes in the other market. For example, a wheat farmer can sell wheat futures to protect the value of their crop. An automobile manufacturer can buy steel futures to hedge the risk of increasing steel prices prior to purchasing physical steel. Hedging allows entities to lock in prices and better manage inventory.