How Futures Hedging Works

A hedge moves price risk to someone willing to carry it. The farmer sells corn futures against unharvested bushels, locking March revenue today.

If prices fall, the crop loses value but the short futures gains, and if prices rise, the cheaper crop covers the futures loss. The exchange clearinghouse stands between parties, margining daily so no one waits on a default.

What remains is basis risk, the local cash versus futures spread, which delivery mechanics anchor but never pin. Done right, hedging stabilizes margins rather than maximizing profits, and the firms that survive commodity cycles are usually the ones that hedge boringly and consistently..