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How Are Futures Contracts Typically Used for ‘Hedging’?

Hedging is the practice of taking an offsetting position in a futures market to mitigate the risk of adverse price movements in the underlying asset. For example, a farmer can sell a futures contract for their crop today to lock in a price and protect against a future price drop.

This transfers the price risk to a speculator willing to take the opposite side of the trade.

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