Hedging is to buy (sell) futures contracts with the same quantity as the spot market, but in the opposite direction, in order to compensate for the actual price risk brought by the price change in the spot market at a certain moment in the future. Example of steel hedging: On August 6, 2008, the thread price in Zhengzhou was 5320 yuan and the futures price was 5600 yuan. A dealer believes that in summer, due to the off-season of the construction industry, the demand for thread decreases and the price of thread falls, and the price of thread will rise after August. Dealers originally wanted to buy 5,000 tons, but because of poor capital turnover, they couldn't buy a lot in advance, so they used the futures margin system (in short, they can buy 100% of the goods by paying 100% margin) to buy 1000 futures contracts in the futures market. On September 25, suppose there are the following situations: situation 1: the price rises, and the futures price rises more than the spot. Spot prices rose 160 yuan, and futures prices rose by 200 yuan. Hedging effect of a trader: On August 6th, the spot market futures market basis was 5320 yuan/ton, and 1000 futures contracts were bought at the price of 5600 yuan/ton -280 yuan/ton. On September 25th, 5000 tons of steel was bought at the price of 5480 yuan/ton, and the futures contract was closed 1000. The price is 5800 yuan/ton -320 yuan/ton. Changes in profit and loss (5320-5480) × 5000 =-80000 yuan (5800-5600) × 5000 =1million yuan. Basis weakened by 40 yuan/ton. On September 25, the dealer's funds were in place, with a price of 5480 yuan per ton. Pay 800 thousand yuan more than in advance. However, due to its hedging in the futures market, it made a profit of 6,543,800 yuan, which not only offset the overpayment of 800,000 yuan (which can also be understood as locking the price at 5,320 yuan on August 6), but also made an additional profit of 200,000 yuan. In addition, for dealers who do not have financial problems, buying hedging means locking the price after buying at a price of 8.6 on September 25, eliminating the storage fees and other related expenses during the waiting period for price increase after buying in advance. Case 2: The increase of futures price is less than the spot price. (Spot price rises 160 yuan, futures rises 100 yuan) On August 6th, the spot market futures market was based on the steel sales price of 5,320 yuan/ton, and futures contracts 1000 lots were bought at the price of 5,600 yuan/ton -280 yuan/ton, and 5,000 tons of steel were bought on September 25th. The price is 5480 yuan/ton, and the futures contract 1000 is closed by hand, and the price is 5700 yuan/ton -220 yuan/ton. The change of profit and loss is (5320-5480) × 5000 =-80000 yuan (5700-5600) × 5000 = 500000 yuan. Basis is strong in 60 yuan/ton. The spot market lost 800,000 yuan and the futures market gained 500,000 yuan, which offset most of the spot losses. Similarly, appropriately avoid price risks. For spot merchants who do not have financial problems, they need to weigh the storage fees and other related expenses after purchasing in advance. However, because people's expectations are often higher than the actual (that is, speculative reasons), in most cases, the increase of futures prices will exceed the spot price, so this situation is usually rare. Situation 3: Futures prices and spot prices rise by the same amount. In this case, the profit of the futures market just offsets the loss of the spot market, that is, break even. But for all spot merchants, it can reduce or even eliminate the storage and other related expenses brought by hoarding spot in advance. Case 4: Futures and spot prices fell (both fell 100 yuan). On August 6th, spot market futures market basis, the steel sales price was 5320 yuan/ton, and futures contracts 1000 lots were bought at the price of 5600 yuan/ton -280 yuan/ton, and 5000 tons of steel were bought on September 25th. The price is 5220 yuan/ton, and the futures contract 1000 is closed by hand, and the price is 5500 yuan/ton -280 yuan/ton. Changes in profit and loss (5320-5200) × 5000 = 500,000 yuan (5500-5600) × 5000 = 500,000 yuan. In this case, the losses in the futures market will be reversed. If the futures price falls more than the spot, there will be losses; If the spot price falls less than the spot price, the profit and loss situation of the two markets is still profitable but the profit decreases.