1. Hedging: refers to buying (selling) futures contracts with the same quantity as the spot market, but in the opposite direction, so as to compensate for the actual price risk caused by price changes in the spot market by selling (buying) futures contracts at some future time.
The most basic types of hedging can be divided into buying hedging and selling hedging. Buying hedging refers to buying futures contracts through the futures market to prevent losses caused by rising spot prices; Selling hedging refers to selling futures contracts through the futures market to prevent losses caused by falling spot prices.
Hedging is the driving force of the futures market. Whether it is the agricultural futures market or the metal and energy futures market, its appearance stems from the spontaneous trading behavior of buying and selling forward contracts when enterprises face the risks brought by the sharp fluctuation of spot prices in the production and operation process. The trading mechanism of this forward contract has been continuously improved, such as standardizing the contract, introducing hedging mechanism and establishing margin system, thus forming modern futures trading. Enterprises purchase insurance for production and operation through the futures market, which ensures the sustainable development of production and operation activities. It can be said that the futures market is not a futures market without hedging.
2. Speculation: The word "speculation" used in futures and securities trading is not a derogatory term, but a neutral word, which refers to the trading behavior of seizing the opportunity and making use of the price difference in the market according to the judgment of the market. Speculators can "short" or "short". The purpose of speculation is very direct-that is, to make profits from the price difference. But speculation is risky.
According to the length of holding futures contracts, speculation can be divided into three categories: the first category is long-term speculators, who usually hold futures contracts for days, weeks or even months after buying or selling them, and hedge when the price is favorable to them; The second type is short-term traders, who generally buy and sell futures contracts on the same day or a trading festival, and do not hold positions overnight; The third category is profit-seekers, also known as "hat snatchers". Their skill is to take advantage of small price changes to make small profits, and they can make multiple rounds of trading in one day.
Speculators are an important part of the futures market and an essential lubricant for the futures market. Speculation enhances the liquidity of the market and bears the risk of hedging transaction transfer, which is the guarantee for the normal operation of the futures market.
3. Spread: refers to buying and selling two different futures contracts at the same time. Traders buy contracts that they think are "cheap" and sell those "high-priced" contracts at the same time, benefiting from the changing relationship between the prices of the two contracts. In arbitrage, traders are concerned about the mutual price relationship between contracts, not the absolute price level.
Arbitrage can generally be divided into three categories: intertemporal arbitrage, cross-market arbitrage and cross-commodity arbitrage.
Intertemporal arbitrage is one of the most common arbitrage transactions. When the normal spread between different delivery months changes abnormally, it is profitable to hedge the same commodity, which can be divided into two forms: bull spread and bear spread. For example, when the exchange carries out the metal bull spread, it buys the metal contract in the recent delivery month and sells the metal contract in the forward delivery month, hoping that the price increase of the recent contract will exceed the price of the forward contract; Bear market arbitrage is the opposite, that is, selling the recent delivery monthly contract and buying the forward delivery monthly contract, expecting the price drop of the forward contract to be smaller than the recent contract.
Cross-market arbitrage is an arbitrage transaction between different exchanges. When the same futures commodity contract is traded in two or more exchanges, there is a certain price difference relationship between commodity contracts due to geographical differences between regions. For example, London Metal Exchange (LME) and Shanghai Futures Exchange (SHFE) both trade cathode copper futures, and the price difference between the two markets will exceed the normal range several times a year, which provides traders with opportunities for cross-market arbitrage. For example, when LME copper price is lower than SHFE, traders can buy LME copper contract and sell SHFE copper contract at the same time, and then hedge and close the trading contract after the price relationship between the two markets returns to normal, and vice versa. When doing cross-market arbitrage, we should pay attention to several factors that affect the spread of each market, such as freight, tariff and exchange rate.
Cross-commodity arbitrage refers to trading by using the price difference between two different but related commodities. These two commodities can replace each other or be restricted by the same supply and demand factors. The form of cross-commodity arbitrage is to buy and sell commodity futures contracts with the same delivery month but different varieties at the same time. For example, metals, agricultural products, metals and energy can all carry out arbitrage transactions.
The reason why traders carry out arbitrage trading is mainly because the risk of arbitrage is low. Arbitrage trading can provide some protection to avoid unexpected losses or losses caused by sharp price fluctuations, but the profitability of arbitrage is also smaller than that of direct trading. The main function of arbitrage is to help distorted market prices return to normal levels, and the other is to enhance market liquidity.
Second, the relationship between hedging, speculation and arbitrage.
Hedging, speculation and arbitrage, as the main forms of futures market transactions, have the same characteristics. First of all, the three are important components of the futures market, and their functions complement each other; Secondly, everyone must determine the direction of the transaction based on the judgment of the market trend; Third, the method and operation method of buying and selling timing are basically the same. But there are also some differences between them: first, the purpose of hedging is to avoid the price risk in the spot market; The purpose of speculation is to earn risky profits; Arbitrage is to obtain relatively stable spread income. Second, the risks are different. Hedging bears the least risk, followed by arbitrage and speculation. If the amount of hedging exceeds the normal output or consumption, it is speculation. Period arbitrage and cross-market arbitrage can also be regarded as hedging transactions if they are accompanied by spot transactions.