An adjustment that is made to the number of futures contracts used in hedging a position in order to accommodate the changing market conditions. Futures contracts are typically marked to market on a daily basis and thus require daily settlement. For positions hedged using futures, a tailing adjustment should be made to account for the changes in valuations in a sense that the present market exposure of the hedge offsets the underlying exposure. The need for tailing adjustment results from the costs and benefits of interest expense or revenue associated with variation margin flows.

For more details, see: tailing the hedge.