Hedging Calculations

The whole unit on one sheet: how to sum the two legs of a hedge, and how that sum reads as a net price.

How Do You Compute a Hedge's Net Result?

• Net result = cash-market result plus futures-market result. A hedge does not aim to profit on futures; the futures leg is meant to offset the cash leg.
• A short futures position's gain is the initial futures price minus the buy-back price (sell high, buy back low). A long futures position's gain is the sell price minus the initial buy price (buy low, sell high).
• A "losing" futures leg inside a hedge is normal, not a failed hedge. When cash gains, the futures leg is designed to show a loss.

What Do the Worked Examples Show?

• Short hedge (producer): futures sold at 440. At harvest, cash is 410 and futures are 420. Sell grain at 410, buy back futures at 420 for a gain of 20. Net result: 410 + 20 = 430.
• Long hedge (processor): futures bought at 440. Later, cash is 470 and futures are 465. Buy grain at 470, sell futures at 465 for a gain of 25. Net cost: 470 - 25 = 445.
• Basis cross-check: ending basis = cash minus futures. Short-hedge example: 410 - 420 = -10; initial futures 440 plus (-10) = 430, matching the net. Long-hedge example: 470 - 465 = +5; initial futures 440 plus (+5) = 445, matching the net cost.

What Is the Net-Price Formula?

• Net price = initial futures price + ending basis, where ending basis is cash minus futures at the moment the hedge is lifted. One formula covers both the seller's net selling price and the buyer's net buying price.
• Equivalent working form: a short hedger (seller) adds a futures gain and subtracts a futures loss from the cash sale price; a long hedger (buyer) subtracts a futures gain and adds a futures loss to the cash purchase price.

How Does a Commission Change the Net?

A round-turn brokerage commission covers entering and exiting the futures position. Unless a question supplies a figure, compute initial futures plus ending basis first, then subtract it from the seller's net or add it to the buyer's net last.

Which Numbers Matter Most?

Which Gotchas Trip Students Up?

Exam Tip: Gotchas

• The net is the SUM of both legs, never the futures result alone. Reporting only the futures gain or loss and calling it the outcome misses the cash leg entirely.
• The seller adds the futures gain to cash; the buyer subtracts it. Mixing up the direction by side turns a helpful hedge into a nonsense number.
• The net anchors to the ENDING basis, not the starting basis. A question that hands you the opening basis plus the closing cash and futures prices is testing whether the ending basis is what actually gets used.
• A stronger basis can still be negative. Moving from 10 under to 5 under strengthens the basis and raises the seller's net, even while the basis stays under the whole time.

One-Breath Recap

A hedge's net result is always the cash-market result plus the futures-market result, and a losing futures leg by itself does not mean the hedge failed since the two legs are designed to offset. A short futures gain is the initial futures price minus the buy-back price; a long futures gain is the sell price minus the initial buy price. The same net collapses to one formula: net price equals the initial futures price plus the ending basis, with the seller adding a futures gain to the cash sale and the buyer subtracting it from the cash purchase. Anchor every calculation to the ending basis, not the opening one, and apply a commission last, lowering the seller's net or raising the buyer's net.

Need more than the recap? Read the full Hedging Calculations unit.