Futures Investment Theory

4. Hedging

(7) Purpose of hedging

One of the basic economic functions of the futures market is to provide a price risk management mechanism for spot enterprises. In order to avoid price risk, hedging is the most common method. The main purpose of futures trading is to transfer the price risk of producers and users to speculators. When spot enterprises use the futures market to offset the reverse movement of prices in the spot market, this process is called hedging.

Hedging is also translated as "hedging transaction" or "Haiqin". Its basic approach is to buy or sell commodity futures contracts with the same trading volume as the spot market, but in the opposite trading direction, so as to offset or offset the actual price risks or benefits brought by the price changes in the spot market by selling or buying the same futures contracts, hedging positions and settling the profits or losses brought by futures transactions at a certain time in the future, So as to stabilize the economic returns of traders at a certain level.

(8) Principle of hedging

First, although the fluctuation range of futures price and spot price will not be completely consistent in the process of futures trading, the trend of change is basically the same. That is, when the spot price of a specific commodity tends to rise, its futures price also tends to rise, and vice versa. This is because the futures market and the spot market are two separate markets, but for specific commodities, the main factors affecting the futures price and spot price are the same. In this way, the factors that cause the rise and fall of the spot market price will also affect the rise and fall of the futures market price in the same direction. The hedger can achieve the function of hedging by doing the opposite transaction to the spot market in the futures market, so as to stabilize the price at a target level.

Second, the spot price and futures price not only have the same trend of change, but also will be roughly equal or combined when the contract expires. This is because the futures price includes all the costs of storing the commodity until the delivery date, so the forward futures price is higher than the recent futures price. When the futures contract is close to the delivery date, the storage cost will gradually decrease or even disappear completely. At this time, the determinants of the two prices are virtually the same, and the futures price and spot price in the delivery month tend to be the same. This is the principle of market trend convergence between the futures market and the spot market.

Of course, the futures market is not the same as the spot market, and it is also affected by some other factors. Therefore, the fluctuation time and range of futures prices may not be exactly the same as the spot price. In addition, there are prescribed trading units in the futures market, and the number of operations in the two markets is often not equal, which means that when hedging profits and losses, It is possible to obtain additional profits, and may also generate small losses. Therefore, when engaging in hedging transactions, we should also pay attention to factors that may affect the hedging effect, such as differences in basis, quality standards, and transaction volume, so that hedging transactions can achieve satisfactory results and provide effective services for the production and operation of enterprises.