Anticipatory Hedge

An anticipatory hedge describes a futures position taken in advance of a future buy or sell transaction. In terms of stock trading, an anticipatory hedge is used when an investor intends on entering the market and wants to reduce his or her risk by taking a long or short position in the target security.

An anticipatory hedge typically involves taking a long position, but can also involve short positions when an eventual sale is being considered. Anticipatory hedges are usually used in order to lock-in a price or protect some amount of the purchase from price fluctuation. Anticipatory hedges are used by investors to control market entry using futures, but they are more commonly associated with businesses using futures to manage input costs.

Anticipatory hedges are a useful tool for businesses to lock in their costs. Businesses frequently run production and demand projections to estimate the materials they need to match their products to expected demand. Using these figures, a business can choose to hedge some or all other of the expected need through anticipatory hedging. For example, an oil refiner expecting a seasonal surge in gas demand in summer for the travel season and a surge in heating oil demand for winter can enter anticipatory hedges to cover the amount of the projected surges and lock-in the current price of oil. These long anticipatory hedges are used by businesses when they expect input costs to rise. Sellers of commodities can also use short anticipatory hedges to protect themselves from downside risks during the time between extracting or growing a commodity and actually selling it.  

Anticipatory hedges are also used directly against currencies when commodity sales are happening across borders. For example, a farmer exports wheat from the United States to England will be paid in pounds once the goods reach the final destination. Unfortunately, global logistics may still require a shipping time of several weeks, so there is a real currency risk when the shipment is to be paid for on delivery. If the farmer is worried that the pound will lose value over that time period when compared to the dollar, he can take a short position on the pound so that he can hedge the anticipated decline.

Anticipatory hedges are often identified as the proper function of the futures market. Basically, the person or entity hedging uses on needs protection for the commodity being hedged. This is in contrast to speculative hedging where an investor is taking up positions based on a market view of pricing changes without an actual stake in the end use of the commodity. Because speculative hedging often exceeds anticipatory hedging by a wide margin, market regulators periodically impose position limits to keep the core function of the futures market based on real commodity markets. When these restrictions are being discussed, anticipatory hedging is often explicitly exempted from proposed position limits so that businesses can secure protection for some or all of their pricing exposure.