The purchase of a
futures contract with the intention of accepting
delivery of the
underlying asset. One conducts a long hedge in order to
lock in a
price for an asset one must purchase in the future. This protects the
holder of the futures contract from
volatility in the underlying asset's price. If the spot price of the underlying asset moves in a direction more beneficial for the holder, he/she can
sell the futures contract and buy the asset at the spot price. An example of a long hedge is a situation in which a company needs to
buy oil by June. The spot price of oil may be $70 per barrel, but the futures price for June delivery may be only $60. The company would choose to buy the futures contract at $60 per barrel. A long hedge is also called a buy hedge.