Hedging is a risk management strategy used to protect investments from potential losses due to unfavourable market movements.
It doesn’t eliminate risk entirely but helps reduce it.
Think of it as buying insurance — just like you insure your car against accidents, you hedge your investments against losses.
What Are Futures?
Futures are standardized contracts that obligate the buyer to purchase, or the seller to sell, an asset at a predetermined price and date.
They are traded on exchanges and are widely used for both speculation and hedging.
How Do Futures Help in Hedging?
Futures can be used as a hedge by taking a position opposite to an existing or anticipated exposure:
Own a stock? → Sell futures on that stock or index.
Worried about input costs rising? → Buy commodity futures to lock in prices.
Exporter concerned about currency fluctuation? → Use currency futures to hedge revenue.
Example 1: Hedging a Stock Portfolio
Investor holds ₹10 lakh worth of a diversified stock portfolio.
He fears a short-term correction → Sells Nifty Futures of equal value.
Market Moves
Portfolio (Spot Market)
Nifty Futures (Hedge)
Net P&L
-2%
₹ -20,000
₹ +20,000
₹ 0
+2%
₹ +20,000
₹ -20,000
₹ 0
Result: Value locked regardless of market direction.
Example 2: Business Hedging – Airline Fuel Cost
Airline buys crude oil futures at ₹6,000 per barrel.
If prices rise to ₹6,800 → futures profit offsets higher costs.
Helps plan ticket pricing and budgets reliably.
Example 3: Currency Hedging for Exporters
Exporter expects $1 million in 3 months.
If USD/INR falls → Rupee income drops.
Solution: Sell USD-INR futures.
If USD weakens → Futures profit offsets FX loss.
Who Uses Futures for Hedging?
User
What They Hedge
Why They Hedge
Mutual Funds / FIIs
Equity portfolios
To avoid losses from corrections
Airlines / Manufacturers
Crude oil, metals, raw materials
Manage costs & pricing
Exporters / Importers
USD, EUR, JPY exchange rates
Stabilize profit margins
Farmers / Producers
Commodity prices (wheat, coffee, etc.)
Ensure fixed income
Retail Investors
Personal stock holdings
Avoid short-term downside risk
Types of Hedging Using Futures
Short Hedge – Sell Nifty Futures to hedge equity holdings
Long Hedge – Buy Gold Futures to protect against price rise
Cross Hedge – Hedge a stock portfolio using index futures
Anticipatory Hedge – Lock-in price before actual transaction
Benefits of Using Futures for Hedging
Liquidity – Easy entry/exit
Leverage – Small margin covers large exposure
Transparency – Exchange-traded, regulated
Flexibility – Equity, commodity, currency
Limitations & Risks
Risk / Limitation
Description
Missed Opportunity
Gains reduced if market moves in your favor
Margin Requirements
Upfront margin ties up capital
Basis Risk
Mismatch between spot and futures
Contract Expiry
Expiry requires rollover
Key Takeaways
Futures reduce risk but don’t remove it entirely.
Hedging is about capital protection, not maximum profits.
Widely used by institutions, businesses, and smart investors.
Strategic futures hedging creates financial stability and predictability.