i.e., he will buy both CALL and a PUT on the same stock with the same exercise price for both options. He carries no one-sided view, neither bullish nor bearish he has a mixed view therefore, he will go for a long straddle. In this straddle, investors have mixed market view, i.e., investors think the market may go down or may go up, and he wants to earn profit in this volatility too. Here, long means “Buy” thus, when we take a position with the buy, it is known as a long straddle. There are many strategies of hedging, few of them amongst them are as follow:

This hedging process will secure both the buyer and seller from the risk of fall or rise of price in the future market. In such circumstances, both farmer (Hedge Seller) and bakery firm (Hedge Buyer) can a make a contract to sell and buy wheat 40 ₹/kg even after the price goes up or fall. Therefore, let us take an example of hedge buyer also, there is a bakery firm who will need wheat for producing their products, but he is also in doubt that the price may rise in next 3 months from 40 ₹/kg to 60 ₹/kg and wants a seller who can sale his wheat stock in 40 ₹/kg. But the farmers are in doubt that the price may fall from 40 ₹/kg to 30 ₹/kg after 3 months when crop cultivates thus, he wants a buyer who can purchase his wheat stock in 40 ₹/kg. Here, the farmer is a hedge seller, and the problem is that the crop will grow after 3 months from now, and the current price of the wheat is 40 ₹/kg.

Suppose, there is a village having numerous farmers cultivating wheat crops. Hedge sale is selling such commodities in future market which are purchased in cash to safeguard himself against price fall when he holds the stock. By buying equivalent quantity in a future market, the producer can cover himself counter to rise in price when he sells some commodities in cash and making such buying in the future market to safeguard oneself from price rise is known as hedge purchase.

Hedging definition finance