Futures Hedge P&L and Effective Price Explained
Learn how to combine cash-market results and futures profit or loss into an effective hedged price, including basis changes, fees, and daily mark-to-market.
Direct answer
Calculate the cash-market result and futures P&L separately, then combine them with consistent signs. The effective hedged price can differ from the opening target because basis, size, timing, and costs change.
A hedge has two economic legs
A hedge is not judged from the futures leg alone.
A short futures hedge can lose money when the cash asset rises, while the cash asset gains value. A long futures hedge can show the opposite pattern.
The useful question is whether the combined result reduced the unwanted price move.
Futures hedge ratio and basis risk explains how contract size and mismatch affect the hedge.
Define the sign and basis convention first
Basis conventions differ across markets, so write yours before calculating.
For this example, basis equals cash price minus futures price.
A short hedge gain per unit is entry futures price minus exit futures price. A long hedge gain uses exit minus entry.
Changing the basis convention without changing the formulas can reverse the interpretation.
Worked example: short hedge and effective sale price
Assume 100 units of an asset are hedged with matching futures exposure.
At entry, cash is 98 and futures are 100, so basis is -2.
At exit, the asset sells for 91 and futures are bought back at 92. The short futures gain is 100 - 92 = 8 per unit.
Cash proceeds are 91 × 100 = 9,100. Futures profit is 8 × 100 = 800.
Before costs, combined proceeds are 9,900, or 99 per unit.
If total trading costs are 30, net proceeds are 9,870 and the effective sale price is 98.70 per unit.
The opening basis implied 98 if basis stayed at -2. The final basis was -1, so basis strengthened by 1 and improved the gross hedge result by 1 per unit. [!TRYMARK] Hedge-reconciliation checkpoint On September 18, record cash 91, futures entry 100, futures exit 92, quantity 100, and costs 30. Recalculate cash proceeds, futures P&L, net proceeds, and effective price independently.
A long hedge reverses the futures sign
A buyer worried about rising prices can use a long futures hedge when the contract fits the exposure.
For a long hedge, futures gain per unit is exit futures price minus entry futures price.
A simple effective purchase price is cash purchase price minus futures gain per unit, before fees and mismatch adjustments.
If the futures leg loses, subtracting a negative gain correctly increases the effective purchase cost.
Daily mark-to-market changes cash timing
Futures P&L is settled through daily mark-to-market rather than waiting for the physical transaction date.
The sum of daily variation should reconcile to the futures trade result, subject to fees, rounding, contract rules, and any position changes.
Futures variation margin explains why hedge cash flows can arrive before the cash-market leg is completed.
A hedge can be economically useful and still require interim liquidity when daily futures losses occur before the offsetting cash benefit is realized.
Reconcile the hedge with a practical checklist
This guide explains hedge accounting logic for a simplified economic example. Actual contracts, accounting treatment, taxes, and broker statements can follow different rules.
- Record the cash exposure quantity and timing
- Record futures entry, exit, multiplier, and contract count
- State the hedge direction and basis convention
- Calculate cash P&L and futures P&L separately
- Include commissions, exchange fees, slippage, and currency conversion
- Check whether quantity or timing changed during the hedge
- Compare opening and closing basis using the same definition
- Reconcile daily variation with the final futures P&L
Common questions
What is the effective price after a short futures hedge?
A simple version is the cash sale price plus the short futures gain per unit, then adjusted for fees and any quantity mismatch.
Why can the final hedge price differ from the price expected at entry?
Basis can change, quantities can differ, the hedge can end on another date, and trading costs or slippage can alter the combined result.
Should I add or subtract futures P&L from the cash price?
It depends on hedge direction. For a short hedge, a futures gain usually adds to sale proceeds. For a long hedge, a futures gain usually reduces the effective purchase cost.
Does daily variation margin change the total hedge P&L?
Daily settlement changes cash-flow timing. If the position and prices are reconciled correctly, the accumulated variation should connect to the futures P&L, subject to fees, rounding, and contract rules.