For a simple example, a food processing factory needs 100 tons of high-gluten wheat for bread in July next year, so he signed a contract with a farm to buy 100 tons of high-gluten wheat in the middle of July next year, with a total amount of 150000 yuan (100 tons *1.
In order to prevent the price of wheat from falling when it expires (if the price of wheat rises at that time, he doesn't have to worry), he also sold the strong gluten wheat contract WS 0907 * * 10 lot (each lot 100 ton * * 100 ton) in Zhengzhou futures market, and the opening price was 1600 yuan.
Suppose that when the wheat is harvested in July next year, the spot price will drop to per ton 1.350 yuan, and the futures price due for delivery will also drop to per ton 1.400 yuan due to the country's improved grain productivity and strong support for agriculture.
If this grocer doesn't hedge in the futures market, he will buy wheat at the market price of 1.500 yuan/ton in July (or choose to default, but the deposit of 30,000 yuan will not be refunded), so the cost of bread he makes is much higher than others.
If he hedges according to the above method, his loss per ton 150 yuan in the spot market can be offset by the small profit of 200 yuan (1600- 1400) in the futures market, which is the function of hedging. The reverse example can also be considered.
2. Arbitrage refers to the method of using the unreasonable price difference between contracts in different months, the price difference of the same product in different markets, and the price difference of similar (related) products in the same market to do the reverse trading of two contracts in the futures market, so as to obtain profits when the price difference expands or shrinks.
Therefore, arbitrage is divided into intertemporal arbitrage (same market), such as CU0905 and CU0907 Shanghai Copper; Cross-market arbitrage, such as arbitrage by using the price difference between London copper and Shanghai copper; Cross-variety arbitrage, such as arbitrage by using the unreasonable price difference between Dalian soybean and soybean meal.
Arbitrage is relatively more complicated than hedging, because not only the factors of spread expansion, but also the factors of spread reduction should be considered, and the change of spread is more complicated.
No matter hedging or arbitrage, traders can't get profits, but they can use these technical means to avoid risks to a certain extent. The same way to avoid risks is to use option trading.