A lower selling price. An offsetting hedge.

Begin with a future sale

Imagine a producer expects to sell 1,000 troy ounces of silver later and has not fixed the physical sale price. A price decline would reduce the proceeds. A short futures hedge takes an opposing financial position intended to offset that exposure. CME defines a selling hedge as selling futures against a commodity that will be sold in the future. The purpose is to manage an existing business risk, rather than create an unconnected wager.

Follow the idealised arithmetic

Assume an exactly matched hedge covering 1,000 ounces is established at USD 30 per ounce. Later, both the physical sale price and the futures closing price are USD 27. Physical proceeds are 1,000 multiplied by USD 27, or USD 27,000. The short hedge gains USD 3 per ounce, or USD 3,000. Together they produce USD 30,000 before costs: the same combined amount as 1,000 ounces valued at the initial USD 30.

Protection has a trade-off

If both prices instead rise to USD 33, the physical sale generates USD 33,000 while the short hedge loses USD 3,000. Combined proceeds again equal USD 30,000 under these assumptions. The hedge exchanges participation in higher prices for protection against lower prices; an isolated futures loss does not establish that the overall hedge failed. These figures describe gross sale proceeds plus hedge results, not operating profit. Mining, processing and other business costs remain to be deducted.

Real hedges are not perfectly matched

The illustration assumes matching quantities and timing, identical physical and futures prices at the relevant points, and no transaction costs. Real outcomes are affected by basis—the difference between cash and futures prices—alongside execution, delivery terms and production uncertainty. Futures losses can also require cash for margin before physical-sale receipts arrive. The 1,000-ounce quantity is a teaching assumption, not a claim about an available contract size. Actual hedging requires suitable contracts, liquidity and operational planning.

FOLLOW THE EVIDENCE

Sources & further reading

Sources checked 14 November 2026. Reference organisations do not endorse this website. Price examples are hypothetical and educational.