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A brief answer to financial derivatives such as options and futures to prevent enterprise price risk
Financial derivatives such as options and futures guard against enterprise price risks.

Futures contracts. Refers to the standardized contract formulated by the futures exchange, which uniformly stipulates the expiration date of the contract and the types, quantity and quality of the assets it buys and sells.

Option trading. It is a transaction of buying and selling rights, which stipulates the right to buy and sell a certain kind, quantity and quality of primary assets at a certain time and price.

Hedging refers to the trading activities in which the futures market is used as a place to transfer the price risk, and the futures contract is used as a temporary substitute for buying and selling commodities in the spot market in the future, so as to insure the prices of commodities to be bought in the future. In the spot market and futures market, the same commodity is bought and sold at the same time in the same amount but in the opposite direction, that is, the same amount of futures is sold or bought at the same time in the futures market. After a period of time, when the price changes make profits and losses in spot trading, the losses in futures trading can be offset or compensated. Therefore, hedging mechanisms are established between "now" and "period" and between short-term and long-term to minimize price risk. Hedging can preserve the value because the main difference between futures and spot of the same specific commodity lies in the different delivery dates, and their prices are influenced and restricted by the same economic and non-economic factors. Moreover, the futures contract must be delivered in kind when it expires, so the spot price and the futures price also have convergence, that is, when the futures contract approaches the expiration date, the difference between the two prices is close to zero, otherwise there will be opportunities for arbitrage. So before the maturity date, there will be arbitrage. In two related markets, the reverse operation will inevitably produce the effect of mutual cancellation. The function of financial derivatives is to avoid risks, and price discovery is a good way to hedge asset risks. However, because the trading of derivatives follows the zero-sum rule and has the characteristics of high leverage, its trading is a process in which one party transfers huge risks to people that the other party is willing to bear. If the operation is good, it can not only avoid risks for its primary investment, but also bring huge benefits. Investing in financial derivatives is a kind of speculation in itself. No matter how much one side earns, it will bring risks to the other side. There is no win-win situation in this market, and there is no possibility that everyone will win. The establishment of the futures market not only enables enterprises to obtain the supply and demand information of the future market through the futures market, but also improves the scientific rationality of the enterprise's production and operation decision-making, and truly determines the production on demand. It also provides a place for enterprises to avoid market price risks through hedging, which plays a great role in preventing enterprise price risks.