Legacy Hedge

A hedge position that a company holds for an extended period of time. Commodity companies, such as gold and oil producers, will often have legacy hedges on their reserves. This gives them a more stable stream of revenue as the hedge provides price guarantees.

Depending on the movement of market prices over time, a legacy hedge can become extremely valuable or negative for the company. For example, suppose that a gold producer hedged five million ounces of gold over a 10-year period beginning in 1998 at $200. If the price of gold falls over the 10-year period, the hedge will benefit the gold producer because it is selling its gold above the market price. However, if the price of gold rises to $500, the gold producer will be selling at a significantly lower rate than the market price and will not benefit from the higher prices.