Long Hedge is a type of hedging strategy that producers or manufacturers use to lower the risk of price fluctuations. It is a futures contract where the buyer intends to take the delivery of the underlying commodity. To know more about it, click on the link given below: https://efinancemanagement.com/investment-decisions/long-hedge

1. By:-
eFinanceManagement.com
https://efinancemanagement.com/investment-decisions/long-hedge
Long Hedge

2. 1. Meaning
2. How it Works?
3. Example
4. Possible Outcomes
5. Reference
Content

3. Long Hedge is a type of hedging strategy that producers or manufacturers use to lower the risk of price fluctuations. It
is a futures contract where the buyer intends to take the delivery of the underlying commodity. In this strategy, the buyer
takes a long futures position. If the rate of the underlying commodity goes up, the futures position offsets the increase in
the price.
Meaning

4. Long hedge is a strategy that a company uses to control its costs.
Executing this hedge is very simple. All that a buyer needs to do is take a long futures position. Such a position means
that the buyer expects the rate of the commodity to rise going ahead. Now, if the price goes up, the profit from the
futures position would help the buyer to offset the rise in commodity prices.
How it Works?

5. Company A makes flour got a big supply contract from Company B in March to be delivered in July.
Company A will needs 50,000 bushels of wheat to break-even @ $7.00 per bushel whose spot price in march is $6.60.
Company A buys July futures @6$6.7 per bushel. Company A starts production when spot price is $7.20 per bushel.
Company A will lose $0.20 per bushel ($7 - $7.2) i.e. $10,000 (50,000*2).
But the July futures has increases to $7.27 per bushel. Hence, Company A have gained $0.57 per bushel ($7.27 - $6.70) i.e.
$28,500 (50,000*$0.57).
Therefore overall gain of Company A is $18,500 (i.e. $28,500 – $10,000).
Example

6. • No change in the cash and futures prices.
• The spot price could increase more than its futures contract price.
• The futures price increase may be more than the increase in commodity spot price.
• Both future price and cash price rise at the same rate.
• The sport price drops more than the price of its futures contract.
• When the futures contract price drops more than commodity sport price.
• Both future price and cash price drop at the same rate.
Possible Outcomes

7. Reference
To know more about it, click on the link given below:
https://efinancemanagement.com/investment-decisions/long-hedge