A hedge transaction that, as opposed to a indirect hedge (dirty hedge or proxy hedge), involves establishing two directionally opposite positions concurrently on the same asset. These position would net off- that is, the effect of a net exposure would remain for a better outcome. In a direct hedge, a long position on a specific asset will be hedged by taking a short position on the same asset. The overall effect of a direct hedge extends beyond closure of a position and re-entering the market at better terms (price, rate, etc.), to keeping a connection with the market: exposure remains there. Once the unfavorable price movement is over, the hedger/ investor can exit the direct hedge position.

For example, an investor has a short position on the the stock market, but he/ she believes that the market index is about to experience a short-term jump in price as a result of positive earnings announcements for its component stocks. In this case, the investor may choose to establish a long position on the index to keep any potential losses under control.

In the real of derivatives, direct hedge can be set up by  hedging a “commodity” position by a position in futures on the same commodity. This aims to eliminate the basis risk associated with the position. Elimination of basis risk would be possible if the hedge is lifted at the expiration date of the futures. If there is no futures contract with settlement dates covering the hedging term, then basis risk will still be in existence, and futures contracts with varying/ mismatched maturities will be an option.