Hedging, commonly known as "Qin Hai", also known as hedging transaction, refers to the fact that traders sell (or buy) futures trading contracts with the same amount as hedging in the futures exchange while buying (or selling) actual commodities. It is an act of temporarily replacing physical transactions with futures transactions in order to avoid or reduce the losses caused by unfavorable price changes.
The basic characteristics of hedging: at a certain point in time, buying and selling the same commodity in the same quantity but in the opposite direction in the spot market and the futures market, that is, selling or buying the same quantity of futures in the futures market while buying or selling the real thing. After a period of time, when the price changes make the spot trading profit or loss, the losses in the futures trading can be offset or compensated. Therefore, hedging mechanisms are established between "now" and "period" and between short-term and long-term to minimize price risk.
Theoretical basis of hedging: the trend of spot and futures markets is similar (under normal market conditions), because these two markets are affected by the same supply and demand relationship, and their prices rise and fall together; However, due to the opposite operation and profit and loss of these two markets, the profit of futures market can make up for the loss of spot market, or the appreciation of spot market is offset by the loss of futures market.
The trading principles of hedging are: (1) the principle of opposite trading direction; The principle of similar goods; Principle of commodity equivalence; Same month or similar month principle.
In fact, hedging in the futures market is a kind of venture capital behavior aimed at avoiding the risk of spot trading, and it is an operation combined with spot trading.
According to the different directions of participating in futures trading, stock index futures hedging transactions can be divided into two categories: buying hedging and selling hedging.
Selling hedging of stock index futures refers to a way for investors to sell the corresponding stock index futures contracts for fear of falling target index or stock portfolio price, that is, selling the stock index futures contracts in the futures market first, and then buying and closing positions after falling, so it is also called "short hedging". The purpose of selling hedging is to lock the selling price of the target index or stock portfolio and avoid the risk of price decline.