Hedging is a deliberate strategy adopted to limit the potential for future losses. For example, airlines may hedge their exposure to rises in aviation fuel by the use of options. The airline might purchase a call option that gives the company the right – but not the obligation – to buy a quantity of fuel from the seller at an agreed price some time in the future. If the price of aviation fuel rises above the agreed price, the airline can exercise the option and buy at the agreed price rather than the spot price. Such hedges are expensive, so airlines may hedge only a proportion of their spend portfolio. Similarly, if a company makes most of its sales in a particular overseas country, then a natural hedge against currency fluctuations is to purchase materials from the same country. Whichever way the currencies move against each other, the buying company will either gain on cheaper materials, or make more profit on sales.

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Discover the world’s largest Glossary of Procurement terms

With over 800 Procurement specific terms (and growing) you will find everything you need to know or thought you knew about the Procurement function. Our aim is to provide you with a comprehensive list collated from the Comprara Groups hub of training and consulting source materials.The Procurement Glossary has been compiled by industry expert Paul Rogers.