Dictionary of Banking Terms: long hedge
long hedge
- purchase of a futures contract to lock in the price of a commodity or financial instrument. Also called a buy hedge. In buying a futures contract, an investor agrees to buy the underlying commodity or financial instrument in the cash market. For example, an investor holding a $5 million bond portfolio maturing in two months can lock in the reinvestment rate with a long hedge. See also short hedge.
- strategy to lock in current yield, anticipating a drop in notes, with purchase of a futures contract or call option.
Dictionary of Finance and Investment Terms: long hedge
long hedge
- futures contract bought to protect against a rise in the cost of honoring a future commitment. Also called a buy hedge. The hedger benefits from a narrowing of the basis (difference between cash price and future price) if the future is bought below the cash price, and from a widening of the basis if the future is bought above the cash price.
- futures contract or call option bought in anticipation of a drop in interest rates, so as to lock in the present yield on a fixed-income security.
