The so-called hedging refers to the trading behavior of traders to set up trading positions (or positions) in the futures market in the opposite direction to the spot market in order to transfer and avoid price risks. Specifically, it is to buy (or sell) futures contracts of commodities with the same quantity as the spot commodities to be bought (or sold) in the futures market, with a view to selling (or buying) all futures contracts of the original commodities in the futures market when buying (or selling) the spot commodities in the spot market at some future time.

(2) Hedging operation

Effective hedging must follow four operational principles:

(1) principle of relative transaction direction. Also known as the "reverse operation principle", that is, taking opposite buying and selling actions in two markets at the same time or successively to establish a mechanism of mutual compensation. Specifically, when buying (or selling) in the spot market at the same time or before and after, the futures contract of the commodity is sold (or bought) in the futures market, so that hedging can achieve the result of losing money in one market and making profits in another market, and the two cancel each other out to achieve the purpose of hedging.

(2) Similar goods or related principles. The futures varieties selected for hedging must be the same as the commodities traded in the spot market. Of course, in the practice of futures trading, there is also a practice called "cross-hedging trading", that is, choosing a futures contract of related commodities that is different from spot commodities, but whose price trends influence each other and are roughly the same. This alternative futures commodity is also the best substitute for spot goods. The stronger the substitution, the better the hedging effect.

(3) The principle of equal quantity of commodities. It means that when hedging, the number of futures contracts selected should be equal to the number actually bought or sold by traders in the spot market. Only in this way can the hedging effect be achieved.

④ The principle of the same or similar months. When hedging, the delivery month of the selected futures contract should be the same as or similar to the time when the trader actually buys or sells the spot goods in the spot market in the future, so as to hedge in the delivery month and complete the hedging transaction.

(3) the function of hedging

Hedging is a conscious defensive measure. Through the reverse operation of the spot and futures markets, the spot and futures will make a profit and a loss, thus reducing or avoiding the price risk after the breakeven. Its function is shown in the following aspects:

① Stabilize social production costs. Because hedging can be carried out, enterprises can arrange production and operation according to the established cost, stabilize their own production and operation activities, and then achieve the effect of stabilizing social costs.

② Promote the formation of a reasonable price level. Hedging itself has the function of stabilizing commodity prices, which is an important aspect of the function of "discovering prices" in futures.

When the market price is low, hedgers will compete to buy contracts in the futures market, making the price rise; When the market price is on the high side, hedgers will sell contracts one after another, which will bring down the price and stabilize the commodity price, thus forming a reasonable price level.

③ It provides a powerful means for enterprises to prevent price fluctuation. Enterprises can choose their own trading direction in the futures market according to their own judgment on the changing trend of commodity prices, so as to eliminate the adverse effects caused by commodity price fluctuations.

(4) Promote product sales, reduce the dilemma of enterprise inventory backlog, and save a lot of storage costs.