Certified Management Accountant 2025 – 400 Free Practice Questions to Pass the Exam

A long hedge is a risk management strategy primarily used by individuals or businesses that expect to purchase an asset in the future at a certain price. The essence of this strategy lies in buying a futures contract to guarantee a set price for the underlying asset. This is particularly helpful for businesses that want to shield themselves from potential price increases that could arise before the actual purchase takes place.

By entering into a long hedge, the buyer locks in the current price, ensuring that they will not have to pay more in the future. This effectively provides them with a form of insurance against market volatility, allowing for better budgeting and cost management. The approach directly addresses the concern of price appreciation, which could adversely impact financial planning and margins if left unhedged.

Other choices do not align with the fundamental concept of a long hedge. Selling futures contracts relates to a short hedge, designed to protect against declining prices. Investing in foreign exchange contracts is a separate activity associated with currency risk management rather than hedging commodity purchases. Lastly, taking a short position generally aims to minimize losses in a falling market, which is contrary to the intentions and mechanics of a long hedge.