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Hedging with futures

8 minute read · By Krishna Avadhani, Vestora Academy · Updated 18 October 2026

Producers and consumers use futures to lock in prices. A wheat farmer sells futures before harvest to fix the selling price; a bakery buys them to fix its cost. An airline may hedge fuel. A fund manager can sell SPI 200 futures to reduce market exposure quickly without selling shares.

The number of contracts for a share portfolio hedge is roughly: (portfolio value x portfolio beta) / (futures price x contract multiplier). A perfect hedge is rare because the asset being hedged and the contract differ (basis risk).

Hedging reduces risk; it does not create profit. A hedged farmer misses out if prices soar, in exchange for certainty.

Formula

Contracts = (Portfolio value x β) / (Futures price x Multiplier)

Key takeaways

  • Hedgers lock in prices to reduce uncertainty.
  • Contracts = (Value x Beta) / (Futures price x Multiplier).
  • Basis risk means hedges are rarely perfect.

Check your understanding

1. A wheat farmer worried about falling prices should...

  • Buy wheat futures
  • Sell wheat futures
  • Buy call options on gold
  • Do nothing
Show the answer

Sell wheat futures. Selling futures locks in the selling price.

2. What is basis risk?

  • The risk the exchange closes
  • The risk the hedge and the hedged asset do not move together exactly
  • Interest rate risk
  • Tax risk
Show the answer

The risk the hedge and the hedged asset do not move together exactly. Differences between the asset and contract leave residual risk.

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General education only, not financial advice. Examples are illustrations. Rules, tax settings and products change; check official sources.