Hedging refers to the trading activities in which the futures market is used as a place to transfer the price risk, and the futures contract is used as a temporary substitute for buying and selling commodities in the spot market in the future, so as to insure the prices of commodities to be bought in the future.

The basic practice of hedging is to buy and sell the same commodity in the same quantity but in the opposite direction in both the spot market and the futures market, that is, to buy or sell the same quantity of futures in the futures market at the same time. After a period of time, when the price changes make the profit and loss in spot trading even, the losses in 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.

The logical principle of hedging;

Hedging can preserve the value because the main difference between futures and spot of the same specific commodity lies in the different delivery dates, and their prices are influenced and restricted by the same economic and non-economic factors. Moreover, the futures contract must be delivered in kind when it expires, so the spot price and the futures price also have convergence, that is, when the futures contract approaches the expiration date, the difference between the two prices is close to zero, otherwise there will be opportunities for arbitrage. So before the maturity date, there will be arbitrage. In two related markets, the reverse operation will inevitably produce the effect of mutual cancellation.