Introduction to Futures _ Futures _ Sina Finance

Hedging can largely offset the risk of price fluctuations in the spot market, but it can not completely eliminate the risk. The main reason is that there is a "basis" factor. To deeply understand and apply hedging and avoid price risk, we must master the basis and its basic principles.

Meaning of Basis

Basis refers to the difference between the spot price of a specific commodity at a specific time and place and the futures price of the recent contract of the commodity, that is, basis=spot price - futures price. For example, the spot price of soybean in Dalian on May 30, 2003 was 2700 yuan/ton. On that day, the price of Yellow Soybean No. 1 futures contract in July 2003 was 2620 yuan/ton, so the basis was 80 yuan/ton. The basis can be positive or negative, depending on whether the spot price is higher or lower than the futures price. If the spot price is higher than the futures price, the basis is positive, also known as forward discount or spot premium; If the spot price is lower than the futures price, the basis is negative, also known as forward premium or spot discount.

The basis contains two components, namely, "time" and "space", which separate the spot market from the futures market. Therefore, the basis includes the transportation cost and the holding cost between the two markets. The former reflects the spatial factors between the spot market and the futures market, which is the basic reason why the basis difference between two different locations is different at the same time; The latter reflects the time factor between the two markets, that is, the holding cost of two different delivery months. It also includes storage fees, interest, insurance premiums and wear and tear fees. The change of interest rate has a great impact on the holding cost.

Basis change and hedging

In the process of real price movement of commodities, the basis is always changing, and the change form of the basis is crucial for a hedger. When the futures contract expires, the spot price and the futures price will tend to be the same, and the basis will show seasonal changes, so that the hedger can use the futures market to reduce the risk of price fluctuations. Basis change is the basis to judge whether hedging can be fully realized. Hedgers can not only achieve better hedging effect by taking advantage of favorable changes in basis, but also obtain additional surplus through hedging transactions. Once the basis changes unfavourably, the hedging effect will be affected and suffer some losses.

For a buying hedger, what he would like to see is a narrowing of the basis.

1. Both spot price and futures price increased, but the increase of spot price was greater than that of futures price rise The range and the basis are expanded, which makes the processor suffer more losses from buying spot goods due to the price rise in the spot market than from selling futures contracts due to the price rise in the futures market. If the prices in the spot market and the futures market do not rise but fall, the processors will gain in the spot market and lose in the futures market. However, as long as the basis expands, the profits of the spot market can not make up for the losses of the futures market, and there will be a net loss.

2. Both spot price and futures price rose, but the rise of spot price was smaller than that of futures price rise The range and the basis are reduced, so that the loss suffered by the processor when buying the spot due to the price rise in the spot market is less than the profit earned by selling the futures contract due to the price rise in the futures market.

If the prices in the spot market and the futures market do not rise but fall, the processors will gain in the spot market and lose in the futures market. However, as long as the basis is narrowed, the profit of the spot market can not only make up for all the losses of the futures market, but also make a net profit.

For those who sell hedges, what they would like to see is the basis expansion.

1. Both spot price and futures price have declined, but the decline of spot price is greater than that of futures price, and the basis is expanded, which makes the dealers suffer more losses from selling goods due to price decline in the spot market than from buying futures contracts due to price decline in the futures market.

If the prices in the spot market and the futures market rise instead of falling, dealers will gain in the spot market and lose in the futures market. However, as long as the basis expands, the profits of the spot market can only make up for some losses of the futures market, and the result is still a net loss.

2. Both spot price and futures price have declined, but the decline of spot price is smaller than that of futures price, and the basis is narrowed, so that the loss suffered by dealers from selling goods due to price decline in the spot market is less than the profit from buying futures contracts due to price decline in the futures market.

If the spot price and futures price do not fall but rise, dealers will gain in the spot market and lose in the futures market. However, as long as the basis is narrowed, the profit of the spot market can not only make up for all the losses of the futures market, but also still have a net profit.

The change trend of futures price and spot price is consistent, but the time and range of the two price changes are not completely consistent, that is, at a certain time, the basis is uncertain, so the hedger must pay close attention to the change of the basis. Therefore, hedging is not a once and for all thing, and adverse changes in the basis will also bring risks to the hedger. Although hedging does not provide complete insurance, it does avoid the price risk associated with business. Hedging is basically the exchange of risks, that is, the exchange of basis fluctuation risk with price fluctuation risk.

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