In fact, the fundamental reason why the futures market exists is that it provides a place for hedgers to transfer price risks. One of the main economic functions of the futures market is to have a price risk transfer mechanism. The existence of this mechanism enables traders in the futures market to avoid or transfer price risks and prevent or mitigate losses. And the means to achieve this goal is hedging. The function of hedging can be summarized as the following aspects.
1. can stabilize the product cost.
Hedging can enable enterprises to avoid the adverse effects of price fluctuations on their operations to a great extent, thus "locking in costs", enabling enterprises to control costs according to operating arrangements, stabilize production and business activities, and thus play a positive role in stabilizing social costs.
2. Save social capital
Hedging transaction can realize the purchase and sale of goods with several times or 10 times the margin with a small amount of margin, so that economic entities can frequently enter the market with less funds, thus getting rid of the situation that economic entities' funds are occupied by a large amount of inventory, saving corresponding storage costs and reducing operating costs. This has accelerated the circulation of social capital and saved social capital to a certain extent.
3. Enhance the liquidity of futures trading.
A dynamic futures contract is always accompanied by a lot of hedging activities, otherwise it will be difficult to exist. Although speculative activities can generate short-term trading volume, most speculative activities are unstable and uncertain, and many speculative yellow holdings often last only a few weeks. The liquidity provided by market makers in the futures trading hall is also very limited, usually only within one day. If there are no speculators and hedgers in one trading pool, market makers will leave quickly and go to another trading pool. Therefore, hedgers are the supporters and main force of the futures market. Hedgers greatly enhance the liquidity of futures trading through hedging transactions.