A purchasing hedge is a transaction that a manufacturing or supply business will make to protect itself against potential price rises in the real materials underlying a future contract. Long hedge, purchaser’s hedge, input hedge, and buying hedge,hedging and screening are all terms used to describe this technique.
A manufacturing company’s executives may employ a purchasing hedge to lock in the price of a commodity or asset they know they’ll need in the future. The purchasing hedge allows the hedging plant’s supplier management to shield the supplier from price volatility in the underlying asset from the moment the buying hedge is initiated until the time the commodity is really needed for production. A purchasing hedge is a risk management method that allows businesses to control price changes in manufacturing inputs.
Buying Hedges: An Overview
A supplier buying a future contract to safeguard against rising prices of the underlying asset or commodity is an example of a buying hedge. A future agreement is a lawfully enforceable agreement to purchase or sell an asset or commodity at a certain price at a predetermined time in the future.
A hedge’s goal is to protect; hence, a hedge position is formed to decrease risk. The hedger, in some circumstances, owns the commodity or asset, while in others, the hedger does not. The hedger buys or sells a future contract to avoid having to deal with cash in the future. A purchasing hedge can also be used by investors if they expect to have a future demand for a commodity or if they intend to enter the market for that commodity at some time in the future.
The Advantages of a Buying Hedge
Many businesses will utilize a purchasing hedging technique to decrease the risk of future price fluctuations for a commodity they require for production. The company will try to lock in a commodity price, such as wheat, pigs, or oil.
If investors anticipate buying a particular amount of the commodity in the future but are concerned about price changes, they may utilize a purchasing hedge. They will purchase a future contract in order to purchase the commodity at a fixed price in the future. If the spot price of the underlying asset changes in the holder’s favor, the future contract can be sold and the item purchased at the spot price.
A purchasing hedge can also be used to protect against a short position that the investor has already placed. The goal is to make a profit in the future market to compensate for the investor’s loss in the cash market. The disadvantage of employing the purchasing hedging approach is that if the commodity price falls, the investor may be better off not buying the hedge.
Conclusion:- The miller, on the other hand, expects a surge in wheat prices this summer as a result of forecasted hot, dry weather, which will reduce wheat output. The miller acquires long positions in September wheat future and may lock at a price of $6.15 per bushel to begin a buying hedge against this prospective price increase. Should wheat prices rise as expected in September, the miller will be able to offset the increase with gains from the buying hedge.
