A hedge can miss because the contract is not the exposure

strategyPublished 20 October 20262 min readcommodities, multi asset

Key points

• The hedge ratio is a size you choose. It is not a promise the prices will match.
• A different month, grade, or currency is a different risk.
• Collateral can force a reduction before the hedge has done its job. The amount is on the contract and the firm, not on this page.

What is going on

An index contract, a commodity contract and a currency contract are different instruments. Each has a multiplier published by the venue. This note does not copy a multiplier from memory. The futures calculator on this site uses a size you type. Basis is the difference between the price you care about and the contract price. It changes. A hedge of a later delivery with a near contract, or of one grade with another, keeps that difference. Rolling into a later month is a new trade, with its own spread. The CFTC and CME publish the rules and the specifications. A marketing line that says the exposure is hedged has not named the contract.

Why it matters

If the exposure falls and the hedge does not rise by the same amount, both can lose, or the hedge can cost more than the loss it offset. Collateral posted against the contract can be increased by the venue or the firm. That is a cash demand, separate from whether the hedge was conceptually right. Delivery and expiry rules decide whether you must exit or accept the contract’s settlement.

What to watch

Write the exposure, the contract, the month, the multiplier you read from the venue, and the cash you can post. Write the basis you are willing to live with. Recheck the specification when the contract changes. Do not infer a multiplier from a ticker symbol.

Risks

Correlation between the hedge and the exposure can fall. Liquidity in the month you need can be poor. A directional trade in the same contract is not a hedge. This page is not a current margin schedule.