A long hedge is an investment technique that protects against loss by setting an agreed price for a product purchased in the future through a futures contract. It is used to offset potential losses in other investments and is often used by business owners to lock in costs for future contracts. Short hedging is used to offset projected losses on long-term investment contracts.
In finance, a long hedge is an investment technique that allows an investor to protect himself against loss by setting an agreed price for a product purchased in the future, in an agreement known as a futures contract. A futures contract is an agreement for an investor to buy a commodity at a specified price on a specified date. When an investor buys or sells an investment to protect himself against price changes, he is hedging. Long covering contrasts with short covering, in which an investor sells borrowed or futures securities in products that he does not already own.
When an investor takes a long position, this means that they have bought a security in the hope of benefiting from rising prices. A long investment is essentially a bet that the price of the investment will increase at the end of the contract, called the delivery date. If the price goes up, the investor benefits from the price difference. Falling prices mean that the investor loses by paying a higher price for a lower value product or stock that he could have bought at the lower price. An investor who hedges long is investing long to offset potential losses in other investments, which may include securities or a business owned by the investor.
Long coverage is often used by business owners who want to lock in costs to fulfill a contract that must be fulfilled in the future. If a pie shop owner obtains a contract for apple pie with a November delivery date in March, the pie shop owner can buy apple futures to hedge against rising apple prices when it arrives. time to make the cakes. By pricing apples now, the store owner ensures that changes in the price of apples do not affect his profit on apple pies, but if the apple price falls lower than the price store owner agreed to buy, she loses the discount. Even if the price of a long hedge investment does not work out in the apple pie shop owner’s favor, she still benefits from the stability of a stable apple price on which she can base cost estimates for the business. .
Short hedging is used to offset projected losses on long-term investment contracts. A properly designed short hedge can eliminate losses incurred on long-term investments. When an investor shorts the stock market, the investor is borrowing shares from a broker to sell with the agreement that the investor will buy the shares on a predetermined date. Investors who are shorting investments are betting that the price of the shorted product or stock will fall. If the security’s price rises, the investor loses money because he then has to pay the higher price for securities previously sold at a lower price.
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