Hedging with Commodity Futures: Real-World Examples

What Is a Commodity Hedge and Why Does It Matter?

A hedge, in its simplest form, is a trade designed to reduce risk on another trade or business exposure. When applied to commodities, it involves taking an opposite position in the futures market relative to your position in the physical market. If you own a commodity (or expect to sell one), you are naturally "long" the physical commodity - meaning you benefit if prices rise and suffer if prices fall. To hedge, you take a "short" position in the corresponding futures contract, which profits if prices fall. The two positions partially or fully cancel out, leaving you with a more predictable net outcome.

The importance of hedging becomes apparent when you consider how volatile commodity prices can be. Between January and December of a typical year, the MCX gold contract can move 15–20 percent, crude oil can swing 30–40 percent, and agricultural commodities can double or halve depending on weather, government policy, and global demand. For a business whose raw material or finished product is a commodity, these swings translate directly into profit or loss.

Consider a company that imports crude oil and refines it into petroleum products. If crude oil prices rise between the time they sign a supply contract and the time the ship docks, they face a massive cost overrun. Similarly, if a farmer plants wheat expecting a certain price at harvest, a bumper global crop could collapse spot prices by 25 percent before they can sell. In both cases, the economic damage is real and can threaten the viability of the business.

Hedging does not make these price movements disappear. What it does is transfer the price risk to another market participant - typically a speculator who is willing to bear that risk in exchange for the possibility of profit. In this sense, commodity futures markets perform a socially valuable function: they allow price risk to flow from those who cannot afford it (producers and consumers) to those who can absorb it (speculators and investors).

In India, hedging is widely practised by large corporations such as oil marketing companies, jewellery manufacturers, flour mills, textile mills, edible oil refiners, and export-oriented agricultural businesses. However, the basic principles are accessible to anyone who understands how futures contracts work. SEBI has also introduced commodity derivatives to all registered brokers through unified exchanges, making it easier than ever for businesses of various sizes to access these markets.

It is important to distinguish hedging from speculation. A speculator has no underlying physical exposure; they take on price risk purely for profit. A hedger, by contrast, already has a price risk in the physical world and uses futures to reduce it. The same instrument - a futures contract - serves entirely different purposes depending on who is using it and why. Understanding this distinction is fundamental to understanding why commodity futures markets exist.

How Commodity Futures Exchanges Work in India

Before exploring hedging examples, a brief primer on India's commodity futures infrastructure is useful. SEBI regulates commodity derivatives in India following the merger of the Forward Markets Commission (FMC) with SEBI in 2015. This brought commodity derivatives under the same regulatory umbrella as equity and currency derivatives, significantly strengthening oversight and investor protection.

MCX - Multi Commodity Exchange

MCX is India's largest commodity derivatives exchange by trading volume, primarily handling metals and energy. Contracts actively traded on MCX include gold, silver, copper, zinc, aluminium, lead, nickel, crude oil, and natural gas. MCX gold and silver contracts are among the most liquid derivative instruments in the Indian market. Contract sizes are standardised - for example, the gold main contract is for 1 kilogram, while a gold mini contract is for 100 grams. Crude oil contracts are denominated in barrels and quoted in INR per barrel.

NCDEX - National Commodity and Derivatives Exchange

NCDEX is India's primary exchange for agricultural commodities. Contracts available include soybean, mustard seed, guar seed, castor seed, cotton, chana (chickpea), wheat, maize, turmeric, jeera (cumin), and several others. NCDEX plays a crucial role in enabling price discovery and hedging for India's large agricultural sector.

NSE and BSE

NSE and BSE also offer commodity derivatives following SEBI's permission for stock exchanges to launch commodity derivative segments. This has further broadened access for participants already active in equity and currency derivatives on these platforms.

How Contracts Are Settled

Commodity futures contracts in India are settled in two ways. Cash settlement means that at expiry, the difference between the final settlement price and your entry price is paid or received in cash - no physical commodity changes hands. Physical delivery means the seller delivers the actual commodity at an approved warehouse or vault, and the buyer takes possession. Not all contracts on MCX and NCDEX offer physical delivery, and even for those that do, most traders close their positions before expiry to avoid the logistics of physical delivery.

For a hedger, the choice between cash-settled and delivery-based contracts matters. A jewellery manufacturer who actually wants to receive gold might prefer a delivery-based contract. However, most commercial hedgers in India use cash-settled contracts for convenience and close them near expiry, transacting in the spot market separately.

Margins and Mark-to-Market

To enter a futures position, you must deposit an initial margin with your broker. As prices move daily, the exchange's mark-to-market process credits or debits your account. Hedgers must ensure they have sufficient funds to meet margin calls, even when the futures position is temporarily going against them (which, if the physical position is moving in their favour, is expected). Failing to meet a margin call can result in the broker liquidating the position - a critical operational risk that every hedger must manage carefully.

Participants who can demonstrate genuine hedging intent may be eligible for different margin treatment or position limits compared to speculators, subject to SEBI and exchange guidelines that are updated periodically. Always verify current rules with your broker or on the exchange's official website.

Real-World Example 1: The Farmer's Short Hedge on Soybean

Agriculture is where commodity hedging has its deepest roots. A farmer in Madhya Pradesh planting soybean in June faces a fundamental price uncertainty: by October, when the crop is ready, prices could be anywhere depending on monsoon performance across India, global soybean production in Brazil and the US, and domestic crushing demand. This is the classic short hedge scenario.

The Setup

Our farmer expects to harvest 200 quintals of soybean in October. In June, NCDEX November soybean futures are trading at ₹5,200 per quintal. The farmer considers this price satisfactory - it covers costs and delivers a reasonable profit. They decide to hedge by selling November soybean futures on NCDEX.

Each NCDEX soybean contract is for 10 quintals. To hedge 200 quintals, the farmer needs to sell 20 contracts (200 ÷ 10 = 20).

Scenario A: Prices Fall (Hedge Works as Intended)

By October, a bumper crop drives spot prices down to ₹4,400 per quintal. The farmer sells the physical soybean at ₹4,400, receiving ₹8,80,000 for 200 quintals. However, the November futures have also fallen to approximately ₹4,420. The farmer closes the short futures position by buying 20 contracts at ₹4,420.

Futures profit per quintal = ₹5,200 − ₹4,420 = ₹780 Total futures profit = ₹780 × 200 quintals = ₹1,56,000

Net realisation = ₹8,80,000 (spot) + ₹1,56,000 (futures) = ₹10,36,000 Effective price = ₹10,36,000 ÷ 200 = ₹5,180 per quintal

The farmer achieved close to the original target of ₹5,200 despite a sharp fall in the spot market. The small shortfall from ₹5,200 represents the basis risk (the futures fell slightly less than the spot).

Scenario B: Prices Rise (Hedge Costs an Opportunity)

Suppose instead that a drought in Brazil cuts global soybean supply, pushing Indian spot prices to ₹6,000 per quintal by October. The farmer sells physical soybean at ₹6,000, receiving ₹12,00,000.

However, futures have risen to ₹6,020. Closing the short position at ₹6,020 results in a loss: Futures loss per quintal = ₹6,020 − ₹5,200 = ₹820 Total futures loss = ₹820 × 200 = ₹1,64,000

Net realisation = ₹12,00,000 − ₹1,64,000 = ₹10,36,000 Effective price = ₹5,180 per quintal

The farmer still earned approximately ₹5,180 per quintal - the same as in Scenario A. The hedge "cost" them the opportunity to benefit from the price rise. This is the fundamental trade-off in hedging: you give up upside to protect the downside.

This example illustrates why hedging is not speculation. The farmer's goal was not to profit from price movements but to secure a viable business outcome regardless of where prices went. The hedge delivered exactly that.

Real-World Example 2: The Jeweller's Long Hedge on Gold

India is one of the world's largest consumers of gold, and the jewellery industry is a central part of that demand. A jewellery manufacturer in Chennai who has received a large order for a wedding in four months faces a classic long hedge scenario. They know they will need to purchase gold, but they do not want to buy it all upfront (which would tie up working capital). They fear that gold prices might rise before they make their purchase.

The Setup

The jeweller needs 5 kilograms of gold in four months. MCX gold (1 kg contract) is currently trading at ₹62,000 per 10 grams, which equates to ₹6,20,000 per kilogram or ₹31,00,000 for 5 kilograms. The jeweller considers this price acceptable and wants to lock it in.

They buy 5 MCX gold futures contracts (each for 1 kg) at ₹6,20,000 per kg.

Scenario A: Gold Prices Rise

Four months later, gold has risen to ₹68,000 per 10 grams (₹6,80,000 per kg). The jeweller buys 5 kg in the spot market at ₹34,00,000. They simultaneously close their long futures position at approximately ₹6,80,000 per kg.

Futures profit per kg = ₹6,80,000 − ₹6,20,000 = ₹60,000 Total futures profit = ₹60,000 × 5 = ₹3,00,000

Effective purchase cost = ₹34,00,000 − ₹3,00,000 = ₹31,00,000 Effective price = ₹6,20,000 per kg - exactly what they planned.

Scenario B: Gold Prices Fall

If gold falls to ₹57,000 per 10 grams (₹5,70,000 per kg), the jeweller buys spot gold at ₹28,50,000 for 5 kg but loses on the futures:

Futures loss per kg = ₹6,20,000 − ₹5,70,000 = ₹50,000 Total futures loss = ₹50,000 × 5 = ₹2,50,000

Effective purchase cost = ₹28,50,000 + ₹2,50,000 = ₹31,00,000 Effective price = ₹6,20,000 per kg - again exactly the planned cost.

Note that in this scenario, the hedge prevented the jeweller from benefiting from lower gold prices. However, the jeweller had already priced their product based on the ₹62,000 level when taking the customer order. Their business model did not depend on gold prices falling; it depended on gold being available at a predictable cost. The hedge served its purpose perfectly.

Practical Complications

In practice, the jeweller will encounter a few real-world frictions. The MCX gold futures contract is for 995 purity gold, but jewellery typically uses 916 purity (22 karat) or lower. This purity difference means the hedge is not a one-to-one match in value terms - a quality adjustment is needed when calculating the hedge ratio. Additionally, the cost of carry (interest cost of holding the futures position plus brokerage and transaction charges) should be factored into the effective cost. These are real costs, but they are far smaller than the risk of an unhedged ₹3–4 lakh swing in gold prices.

Real-World Example 3: The Importer's Crude Oil Hedge

India imports approximately 85 percent of its crude oil requirements, making oil price risk one of the most significant commodity risks in the Indian economy. Oil marketing companies, petrochemical manufacturers, airlines, and paint companies all face crude oil price risk. Let us examine how a hypothetical paint manufacturer might hedge their exposure to crude oil, which is the feedstock for several key raw materials including solvents and certain resins.

The Setup

A paint manufacturer in Gujarat needs to purchase approximately 5,000 barrels' worth of crude-oil-derived feedstock over the next two months. MCX crude oil futures are currently trading at ₹7,200 per barrel. The company's finance team decides to hedge 80 percent of the exposure (a hedge ratio of 0.8), covering 4,000 barrels.

Each MCX crude oil contract is for 100 barrels. To hedge 4,000 barrels, they buy 40 contracts at ₹7,200 per barrel.

Two Months Later: Scenario A - Crude Rises to ₹8,500 per barrel

The company purchases their physical raw materials at market prices that reflect the ₹8,500 crude oil level. Their raw material cost is roughly ₹1,300 per barrel higher on 5,000 barrels = ₹65,00,000 additional cost.

On the futures side, they close their 40 long contracts at ₹8,500: Futures profit = (₹8,500 − ₹7,200) × 4,000 barrels = ₹1,300 × 4,000 = ₹52,00,000

Net additional cost = ₹65,00,000 − ₹52,00,000 = ₹13,00,000

Because they only hedged 80 percent of their exposure, they still bear 20 percent of the upside risk - ₹13 lakh in this case. But they avoided ₹52 lakhs of additional cost, which could have severely impacted their margins.

The Role of MCX in This Hedge

MCX crude oil futures are priced in INR per barrel and are benchmarked to WTI (West Texas Intermediate) crude prices, adjusted for the USD/INR exchange rate. This means the hedger is also implicitly hedging part of their currency risk, since crude oil is invoiced in USD globally. However, the currency and commodity risks are not perfectly aligned in the futures contract, creating a cross-hedge situation where the hedger must be aware of the additional currency basis risk.

This complexity is one reason why large corporates often use a combination of commodity futures and currency forward contracts to fully hedge their exposure, while smaller businesses may use only one instrument.

Why 80 Percent and Not 100 Percent?

The company chose an 80 percent hedge ratio for several reasons. First, they had some view that crude prices might fall, and a 100 percent hedge would eliminate all upside from that scenario. Second, the cost of margin and transaction charges increases with the number of contracts. Third, their physical raw material prices are not perfectly correlated with MCX crude futures, so a 100 percent hedge might actually introduce more basis risk in some scenarios. Determining the optimal hedge ratio is a quantitative decision that large companies typically make with the help of risk management teams.

Cross-Hedging: When There Is No Exact Futures Contract

One practical limitation of commodity hedging is that futures contracts do not exist for every commodity. MCX and NCDEX offer contracts for a defined list of commodities, and not every agricultural product, metal alloy, or energy derivative has its own listed contract. In these situations, hedgers use cross-hedging - using a futures contract for a related commodity that is highly correlated with the commodity they are trying to hedge.

Aviation Fuel and Crude Oil

Airlines are a classic example of cross-hedging users. Jet fuel (Aviation Turbine Fuel or ATF) is a refined product of crude oil, and its price moves closely with crude oil prices. However, there is no ATF futures contract on Indian exchanges. Airlines therefore hedge using crude oil futures on MCX, accepting that the hedge is imperfect because jet fuel prices do not move in lockstep with crude.

The effectiveness of a cross-hedge depends on the correlation between the spot price of the commodity being hedged and the futures price of the substitute commodity. A high correlation (above 0.85) generally indicates a usable cross-hedge. Statistical tools such as regression analysis are used to calculate the optimal hedge ratio in a cross-hedge.

Mustard Oil and Mustard Seed

In agriculture, a mustard oil producer may want to hedge their finished product price risk. If there is no mustard oil futures contract available, they might use NCDEX mustard seed (rapeseed) futures as a proxy, since mustard oil prices are closely linked to mustard seed prices. The correlation is typically high because oil is approximately 38–42 percent of the weight of mustard seed, and refining costs are relatively stable.

Cotton Yarn and Cotton

A textile mill that spins cotton into yarn may use MCX cotton futures to hedge their raw material cost. However, the correlation between raw cotton futures and cotton yarn prices is imperfect because yarn prices are also influenced by spinning margins, labour costs, and polyester competition. The hedge provides significant but not complete risk reduction.

Risks of Cross-Hedging

Cross-hedging introduces additional basis risk beyond the normal futures-to-spot basis risk. The relationship between two commodity prices can change over time due to structural shifts in supply, demand, or processing costs. A hedger relying on a historically high correlation might find that the relationship breaks down precisely when they need the hedge most.

Despite this risk, cross-hedging is widely used because even an imperfect hedge is substantially better than no hedge for most businesses. The key is to monitor the correlation regularly and adjust the hedge ratio if the relationship weakens. Large companies with active risk management desks do this as a matter of routine; smaller businesses often rely on their brokers or commodity trading advisors for guidance.

Documentation and Compliance

For cross-hedging to be recognised as a genuine hedging activity for accounting and tax purposes (rather than speculation), companies typically need to document the economic relationship between the hedged item and the hedging instrument. This is also relevant under Indian accounting standards (Ind AS 109 on financial instruments) for those seeking hedge accounting treatment, which affects how gains and losses on derivatives are reported in financial statements.

Hedging in the Export Business: Protecting Revenue in INR

Indian exporters of agricultural commodities such as castor oil, spices, cotton, or rice face a dual risk: the commodity price in USD might fall, and the INR might strengthen (appreciate), both of which reduce INR-denominated revenue. Commodity hedging addresses the first risk, while currency hedging addresses the second. Understanding how these two work together is important for exporters.

The Castor Oil Exporter

India is the world's dominant producer and exporter of castor oil. A castor oil exporter in Gujarat who has contracted to deliver 500 tonnes of castor oil in four months at a fixed USD price faces price risk in the interim: if castor seed prices rise domestically, their input cost increases while their selling price is fixed.

To hedge this, the exporter can sell castor seed futures on NCDEX for the equivalent of 500 tonnes of castor oil (accounting for the yield - approximately 1.5–1.6 kg of castor seed is needed per kg of castor oil). This protects against a rise in castor seed input costs.

Simultaneously, if the INR/USD rate is also uncertain, they might use currency futures on NSE to lock in the INR equivalent of their USD receivable. This combined hedging strategy - using both commodity and currency futures - is standard practice among large agri-exporters.

The Spice Exporter and Basis Risk from Export Premium

An exporter of jeera (cumin seeds) faces a slightly different challenge. NCDEX jeera futures are based on domestic Indian prices, but export prices often carry a quality premium (or discount) relative to domestic futures. The basis between what the exporter receives in the international market (converted to INR) and the NCDEX futures price is therefore influenced by global demand, quality differentials, and shipping costs.

In years when global demand is strong, the export premium widens, making the hedge less perfect. In years when domestic production is high, the premium may narrow or become a discount. The exporter must model these scenarios when designing the hedge.

The Role of Physical Delivery Contracts

For some agricultural commodities on NCDEX, physically delivered contracts allow an exporter to actually sell their produce through the exchange mechanism. This is particularly relevant for commodities where warehousing infrastructure is available at exchange-accredited warehouses. However, the geographic concentration of exchange warehouses can mean that delivery may not be practical for all hedgers, again introducing a location basis risk.

Regulatory Considerations for Exporters

SEBI has specific guidelines on who can participate in commodity derivatives as hedgers versus speculators. Exporters and importers with demonstrated physical commodity exposure can access higher position limits than pure speculators. Maintaining proper documentation of the underlying physical business is essential to access these benefits. Consult your broker and refer to the latest SEBI circulars for current position limit rules.

Additionally, gains and losses on commodity derivatives have tax implications under Indian tax law. The treatment of gains from futures contracts - whether as business income or capital gains - depends on the nature of the taxpayer and the purpose of the transaction. Since tax rules are subject to change with each Finance Act, always refer to the latest Finance Act and consult a qualified tax professional.

Using Commodity Options as an Alternative or Complement to Futures Hedges

While futures hedges are the most common form of commodity risk management, commodity options offer a different risk-reward profile that can be more suitable in certain situations. Understanding the difference between the two instruments is important for making an informed choice.

How Commodity Options Work

A commodity option gives the buyer the right, but not the obligation, to buy (call option) or sell (put option) a commodity futures contract at a specified price (the strike price) on or before a specified date. In return for this right, the buyer pays a premium to the seller (writer) of the option.

On MCX, commodity options are available on gold (on gold futures as the underlying) and crude oil, among others. These are European-style options that expire on a specific date. The option premium is determined by factors including the current futures price, the strike price, time to expiry, and the implied volatility of the commodity.

Using Put Options as a Price Floor for Producers

A farmer or metal producer who wants to protect against price falls without giving up the upside can buy a put option. For example, a soybean farmer could buy a put option with a strike price of ₹5,000 per quintal, paying a premium of ₹120 per quintal. If prices fall to ₹4,200 by expiry, the put option is exercised, effectively protecting a floor price of ₹5,000 − ₹120 premium = ₹4,880 per quintal. If prices rise to ₹6,000, the put expires worthless, and the farmer sells at ₹6,000 in the spot market, netting ₹6,000 − ₹120 = ₹5,880 per quintal.

This asymmetric profile - you participate in the upside but are protected against the downside - is the key advantage of options over futures for hedging purposes. The trade-off is the upfront premium, which is a definite cost regardless of price outcome.

Using Call Options as a Price Cap for Consumers

A manufacturer or importer who is concerned about input costs rising can buy call options. A call option with a strike price of ₹7,500 per barrel on crude oil (at a premium of ₹250 per barrel) ensures that if crude rises above ₹7,500, the manufacturer is compensated for costs above that level. If crude falls, the call expires worthless and the manufacturer benefits from lower spot prices, minus the ₹250 premium paid.

Collars and Other Option Structures

Larger companies sometimes use option combinations called collars or zero-cost collars. In a collar, a producer buys a put option (floor price protection) and simultaneously sells a call option (giving up upside above a certain level) to partially or fully finance the put premium. The result is that the effective price is confined within a corridor - protected from falling below the floor and capped from rising above the ceiling. This structure is popular because it can be structured at zero net premium.

Liquidity Limitations

The main constraint with commodity options in India is liquidity. Compared to equity options on Nifty 50 (which are among the world's most liquid options markets), commodity options on MCX have lower open interest and wider bid-ask spreads. This means that executing large option trades, or rolling options forward, can be more expensive in practice than the theoretical models suggest. Traders should always check current bid-ask spreads and open interest before committing to an options-based hedging strategy.

Building a Systematic Hedging Programme: From Policy to Execution

For businesses that need to hedge commodity exposure regularly, ad hoc hedging is not sufficient. A systematic hedging programme - governed by a clear policy and executed by a dedicated process - is far more effective and reduces the risk of emotional or reactive decisions.

Step 1: Identify and Quantify the Exposure

The first step is to map out all the ways in which the business is exposed to commodity price risk. This includes direct exposures (raw materials purchased, finished goods sold) and indirect exposures (energy costs, freight costs that depend on fuel prices). Quantify each exposure in terms of volume, timing, and price sensitivity. For example, a flour mill might identify that it will need 10,000 tonnes of wheat over the next six months, with purchases spread evenly across months.

Step 2: Define the Hedging Objective

Is the goal to lock in a specific margin? To stay competitive with peers? To satisfy lender covenants that require minimum hedging? To manage cash flow predictability? The objective shapes the entire hedging strategy. A company with thin margins and high fixed costs might pursue a more aggressive hedge ratio than one with flexible pricing power.

Step 3: Choose the Hedging Instrument

Based on the commodity, available futures and options contracts on MCX or NCDEX, the cost of hedging, and the liquidity of available contracts, choose the appropriate instrument. Consider whether options might be preferable to futures for certain exposures.

Step 4: Determine the Hedge Ratio and Tenure

Decide what proportion of the exposure to hedge and over what time horizon. Many companies adopt a layered approach - hedging a higher proportion of near-term exposures (70–80 percent of the next three months) and a lower proportion of longer-term exposures (40–50 percent of six to twelve months out), reflecting increasing uncertainty over time.

Step 5: Execute and Monitor

Once the policy is set, execute the trades systematically. Monitor the hedge regularly - checking both the futures position mark-to-market and the underlying physical exposure. If the physical exposure changes (for example, a large order is cancelled), the hedge must be adjusted accordingly.

Step 6: Lift the Hedge and Reconcile

When the physical transaction occurs, close the futures position. Record the net effective price achieved - physical transaction price plus or minus futures gain or loss - and compare it with the original hedging objective. This post-trade analysis builds institutional knowledge and helps refine future hedging decisions.

Step 7: Report and Govern

A formal hedging programme should have governance oversight - typically the CFO or a risk committee reviewing hedging positions regularly. All derivative positions should be reported transparently to management, with clear lines of accountability. Misuse of hedging programmes (for example, converting to speculation when the hedge goes in your favour and you want to milk the position) can create significant financial and regulatory risk.

For listed companies, SEBI requires disclosure of derivative positions in periodic financial reporting. Proper classification of hedging instruments under Ind AS is also important for presenting a true and fair view of the company's financial risk management to investors.

Example

Key benefits

How it works

1. 1
   Identify the Physical Exposure

   Determine whether you face the risk of prices rising (buyer) or falling (seller), quantify the volume and timing of the exposure, and confirm that a related futures contract exists on MCX or NCDEX.

2. 2
   Choose the Correct Futures Contract

   Select the exchange, contract month, and contract size that best matches your physical transaction timeline. For agricultural commodities, NCDEX is primary; for metals and energy, MCX is primary.

3. 3
   Calculate the Number of Contracts

   Divide the total physical exposure (in the commodity's unit of measure) by the lot size of one futures contract, adjusting for the desired hedge ratio. Ensure the calculation accounts for any quality or location differences.

4. 4
   Execute the Futures Trade

   Open your futures position through a SEBI-registered commodity broker - sell futures for a short hedge or buy futures for a long hedge. Deposit the required initial margin and maintain sufficient funds for potential mark-to-market margin calls.

5. 5
   Monitor the Hedge Continuously

   Track both the physical exposure and the futures position regularly. If the underlying physical volume changes, adjust the number of futures contracts accordingly to avoid over- or under-hedging.

6. 6
   Roll the Position if Necessary

   If the physical transaction is delayed beyond the futures contract's expiry, roll the position by closing the near contract and opening the next contract month, accounting for the roll cost (contango) or roll income (backwardation).

7. 7
   Lift the Hedge and Reconcile

   When the physical transaction occurs, close the futures position and calculate the net effective price. Compare the outcome with your hedging objective and document the basis realised for future reference.

Formula

Effective Net Price = Physical Spot Price ± Futures Gain or Loss
Hedge Ratio = (Units of Physical Exposure) ÷ (Lot Size × Number of Contracts) × Target Coverage %

Key takeaways

Frequently asked questions

Related terms