By purchasing related financial futures contracts, investors set up futures contracts in the financial futures market with the same number and opposite direction as the spot positions, in order to compensate the price risk brought by the price changes in the spot market by selling or buying futures contracts at some time in the future. From the perspective of the whole financial futures market, its risk aversion function can be realized mainly because it has the following characteristics:
First, financial futures have the characteristics of transforming the uncertainty of forward trading into the current certainty. Traders can lock in costs or profits by buying and selling futures contracts, and reduce operational and investment risks.
Second, the futures price and spot price of financial commodities generally change in the same direction. Because there are a large number of arbitrageurs in the financial futures market, if the difference between the spot price of financial products and the futures price, that is, the basis difference is greater than the arbitrage cost, the arbitrageurs will enter the market to carry out arbitrage operations, so that the futures price and the spot price are consistent and convergent. After an investor establishes a position in the financial futures market that is opposite to the financial spot market, when the price of financial commodities changes, it is bound to gain in one market and lose in the other, and its profit and loss can be offset in whole or in part, thus achieving the purpose of avoiding risks.
Third, the financial futures market has concentrated many speculators through standardized floor trading. The futures market with only hedgers is unlikely to reach a balance between buying and selling. Because of the existence of speculators, they bear market risks and become the counterparties of hedgers, thus successfully realizing the risk transfer function of the futures market. Speculators make the financial futures market highly liquid through frequent and large-scale transactions. In the financial futures market, hedgers can trade in time at an acceptable price, which is also the main advantage of futures trading compared with forward trading. The financial futures market has an effective price discovery mechanism, which is related to its own characteristics: First, the leverage and low transaction cost of financial futures trading make it have a better and more effective price discovery mechanism. Leveraged trading greatly reduces the cost of capital possession of traders, and the low transaction cost makes the total transaction cost of traders lower than that of spot trading. For example, in the United States, the total transaction cost of financial futures investment is only about 1/7 of the spot transaction cost. According to the principle of transaction cost, the lower the transaction cost, the easier it is to form an equilibrium price. Therefore, in this low transaction cost environment, the financial contract price formed in the financial futures market is closer to the equilibrium price than the spot transaction price.
Second, the financial futures market has a good short-selling mechanism. Although some spot markets can also be short, there are many restrictions and high costs; The futures market can close its position by hedging before delivery, so shorting is very convenient and the cost is very low. Short-selling mechanism enables investors to fully implement the relevant information of futures prices, without being restricted by the fact that they must have cash in hand when selling, which also makes futures contract prices more reflective of all kinds of information than spot prices.
Thirdly, because the financial futures market has the advantages of leveraged trading and low transaction cost environment, it attracts many information traders with certain information. In organized, centralized and standardized markets such as exchanges, they determine the transaction price by means of similar auctions, which is close to a perfectly competitive market. Although not everyone's price expectation is unbiased, due to the large number of people, the equilibrium price achieved is the actual equilibrium price. Therefore, the transaction price of financial futures contracts can comprehensively reflect the influence of various factors in the financial market on the underlying commodities, which is characterized by openness and transparency.
Fourth, it has strong anticipation. The forward delivery of futures trading enables futures prices to reflect investors' expectations of financial commodity price trends and forward supply and demand of financial commodities to a certain extent. Compared with the spot market price, this predictability of financial futures prices greatly improves the information quality of prices, enabling participants in futures markets to adjust their economic activities according to forward prices and reduce economic fluctuations.