Hedging refers to taking the futures market as a place to transfer price risk and using futures contracts as temporary substitutes for buying and selling goods in the future spot supply market.

For example, a farmer is worried that the price of agricultural products will fall in the future, so he will pre-sell the last crop at a fixed price before harvesting;

For another example, an enterprise thinks that the price of raw materials will rise in the future, so it books the raw materials that need to be used in the future at a fixed price in the futures market.

A simple example of hedging

Party A is a supplier of skin care products, and Party B is a seller of skin care products. Party B needs to purchase goods from Party A. Due to the current unstable price of skin care products, Party A and Party B purchase futures:

(1) A is worried about the decline in the price of skin care products. Once the price of skin care products falls, the profit earned by A will decrease, so A issues futures to protect its rights and interests.

As a result, the price of skin care products has dropped, and some people will buy skin care products at a price that has not dropped; Not only can the loss be greatly reduced.

(2) B is worried about the price increase of skin care products. If the price of skin care products rises, it will affect B's income or B's sales, so B buys futures issued by A;

When the price of skin care products increases, you can buy skin care products at the original price, which can reduce your own losses.

(3) Assume that the original price of skin care products is 80 yuan/piece, and now the price has increased to 85/ piece; Then b lost.

Because B can buy futures at a price lower than the market price of 5 yuan, the resulting difference is borne by B. ..

If the price of skin care products falls, the current 77 yuan/month, then A earns B losses; Because b needs to buy skin care products at a price higher than the market price in 3 yuan.