Investments, tenth edition

   Hedging and Speculation 

 Hedging and speculating are two polar uses of futures markets. A speculator uses a futures 

contract to profit from movements in futures prices, a hedger to protect against price 

movement. 

 If speculators believe prices will increase, they will take a long position for expected 

profits. Conversely, they exploit expected price declines by taking a short position.  

    22.3 

Futures Markets Strategies 

 Suppose you believe that crude oil prices are going to increase and therefore decide to 

purchase crude oil futures. Each contract calls for delivery of 1,000 barrels of oil, so for 

every dollar increase in the futures price of crude, the long position gains $1,000 and the 

short position loses that amount. 

 Conversely, suppose you think that prices are heading lower and therefore sell a 

contract. If crude oil prices do in fact fall, then you will gain $1,000 per contract for 

every dollar that prices decline. 

 If the futures price for delivery in February is $91.86 and crude oil is selling at the 

contract maturity date for $93.86, the long side will profit by $2,000 per contract pur-

chased. The short side will lose an identical amount on each contract sold. On the other 

hand, if oil has fallen to $89.86, the long side will lose, and the short side will gain, 

$2,000 per contract.