Long hedge is that type of hedge in which company takes the decision of future contract agreement. This agreement is of purchase of anything in future date but its purchase price is locked current time. With this, company can save from future fluctuations of prices of product. To do this type of contract need high level of vision.

For example, company A needs sugarcane of 5000 tonnes for making sugar in march. but there is expectation of  big price volatility in its future prices. Company may contract with farmer to buy 5000 tonnes Rs. 1000 per tonne in march. This price is locked in sept. After 7 months, current market price of sugarcane is Rs. 2000 per tonne. At that time, company will buy 5000 tonnes of sugarcane @ Rs. 1000 per tonne instead of Rs. 2000 per tonne. So, company will gain Rs. 1000 per tonne. This contract will be long hedge contract.

Benefits of Long Hedge

1. Reduce the Price Risk

With long hedge, company can reduce the price risk. This risk is of increasing the price. Increasing the price in future means increasing the cost of production. So, long hedge protects company against upward price.

2. Increase profit potential

With doing long hedge contract, you can increase your profit potential. If price is increased by market according to your expectations, you will pay according to long hedge, so you will get cheap goods and if you sell same goods at current prices, you will gain more.

Formula of Calculating the Profit in Long Hedge Agreement:

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