HEDGING

Any method of minimizing the risk of price change. Since the movement of cash prices is usually in the same direction and about in the same degree as the movement of the present prices of futures contracts, any loss (or gain) resulting from carrying the actual merchandise is approximately offset by a corresponding gain (or loss) when the contract is liquidated. Hedging is also taking a position in a futures market opposite to a position held in the cash market to minimize the risk of financial loss from an adverse price change; or a purchase or sale of futures as a temporary substitute for a cash transaction that will occur later. One can hedge either a long cash market position (e.g., one owns the cash commodity) or a short cash market position (e.g., one plans on buying the cash commodity in the future).