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HMRC internal manual

VAT Finance Manual

Financial derivatives: hedging

Hedging is a method of protecting against a financial risk arising from price fluctuations. For example, when a trader has bought but not sold contracts for commodities or financial instruments he holds an open position. The risk can be hedged by buying an equal and opposite futures contract (i.e. to sell), which offers some (but not complete) protection against the vulnerability of an open position.