Hedging refers to futures trading for the purpose of avoiding spot price risk.

Traditional hedging:

It means that producers and operators buy or sell a certain number of spot commodities in the spot market, and at the same time sell or buy futures commodities (futures contracts) with the same variety and quantity as the spot commodities in the futures market, but in the opposite direction, so as to make up for the losses in another market with the profits of one market and avoid the risk of price fluctuation. The role of hedging

Hedgers refer to those manufacturers, institutions and individuals who regard the futures market as a place for price risk transfer and use futures contracts as a temporary substitute for buying and selling commodities in the spot market in the future to hedge the prices of commodities they buy (or own or own in the future) to be sold or need to buy in the future. Hedging principle

Hedging can avoid risks, because the futures market has the following basic economic principles:

(1) The futures price trend of the same commodity is consistent with the spot price trend.

(2) As the expiration date of futures contracts approaches, the prices of spot market and futures market tend to be consistent.

Hedging operation principle

(A) the principle of similar goods

(two) the principle of the same quantity of goods.

(3) the principle of the same or similar month

(4) the principle of opposite transaction direction

Application of hedging

The risk of price fluctuation faced by production and operation enterprises can finally be divided into two types: one is worried about the future price increase of a certain commodity; The other is worrying that the price of a commodity will fall in the future. Purchase hedging

Buying hedging means that the hedger first buys the same number of futures contracts with the same or similar delivery date in the futures market, and buys short positions and holds long positions in the futures market in advance. Applicable object and scope

1, in order to prevent the future purchase of raw materials, processing and manufacturing enterprises will increase their prices.

2. The supplier has signed a spot contract with the buyer to deliver the goods in the future, but the supplier has not purchased the goods at this time, fearing that the price will rise when purchasing the goods in the future. 3. The demander thinks that the current spot market price is very suitable, but due to the lack of funds or foreign exchange, or the goods that meet the specifications can't be found at the moment, or the warehouse is full, it can't buy the spot immediately, and it is worried about the future spot price increase. Sales hedging

Selling hedging means that the hedger first sells commodity futures contracts with the same quantity and the same or similar delivery date in the futures market:

1. Manufacturers, farms and factories that directly produce physical commodity futures have not yet sold or will soon produce some harvested physical commodity futures, fearing that the price will fall when they sell them in the future; 2. Storage and transportation companies and traders have inventory on hand and have not sold it, or storage and transportation companies and traders have signed a contract to buy a commodity at a specific price in the future but have not resold it, fearing that the price will fall when they sell it in the future; 3. Processing and manufacturing enterprises are worried that the prices of raw materials in stock will fall in the future.

Basis and hedging

First, the basic concept.

Basis is the difference between the spot price of a commodity in a specific place and the specific contract price of the same commodity. Basis = spot price-futures price.

Basis function

Basis is a very important concept in futures trading and an important indicator to measure the relationship between futures prices and spot prices. Basis is the basis of successful hedging. Based on the principle of "double betting, reverse operation and reciprocal opposition", hedgers operate in both the spot market and the futures market at the same time, and use the profits of one market to make up for the losses of the other market, so as to establish a "mutual offset" mechanism between the two markets, thus achieving the purpose of transferring price risks.

The difference between option trading and futures trading

First, the rights and obligations of buyers and sellers are different.

The risks and benefits of futures trading are symmetrical. Both parties to a futures contract are endowed with corresponding rights and obligations. If we want to avoid the obligation of futures contract due, we must hedge before the contract delivery date, and the rights and obligations of both parties can only be exercised when the delivery date comes.

However, the risks and benefits of option trading are asymmetric. An option contract gives the buyer the right to buy or sell within the validity of the contract. That is to say, when the buyer thinks that the market price is favorable to him, he exercises the right to ask the seller to perform the contract. When the buyer thinks that the market price is unfavorable to him, he can give up his rights without consulting with the option seller, and his loss is only a small royalty paid in advance for purchasing the option. It can be seen that the option contract is not mandatory for the buyer, and the buyer has the right of execution and waiver; But for option sellers, this is mandatory. In American option, the buyer of the option can demand to perform the option contract on any trading day within the validity period of the option contract, while in European option trading, the buyer can only demand to perform the option contract when the performance date of the option contract comes.

Second, the transaction content is different.

In terms of transaction content, futures trading is a standardized contract to pay a certain number and grade of physical objects in the future, while option trading is a right, that is, the right to buy and sell a certain subject matter at a fixed price in a certain period of time in the future.

Third, the delivery price is different.

The futures price for due delivery is formed by bidding, which comes from the expectation of all participants in the market for the maturity price of the contract subject matter, and the focus of all parties in the transaction is on this expected price; The price of the due delivery option shall be determined according to the regulations when the option contract is launched for listing. This is a contract constant that is not easy to change. The only variable of standardized contract is option premium, and the focus of both parties is on this premium.

Fourth, the provisions of the deposit are different.

In futures trading, both buyers and sellers must pay a certain performance bond; In option trading, the buyer does not need to pay the deposit, because his biggest risk is the premium, so he only needs to pay the premium, but the seller must pay the deposit and add the deposit if necessary.

5. Different price risks

In futures trading, the price risk borne by both parties is infinite. In option trading, the loss of the option buyer is limited, the loss will not exceed the premium, and the profit may be unlimited-in the case of buying call options; It may also be limited-in the case of buying put options. The loss of the option seller may be infinite-in the case of selling call options; It may also be limited-in the case of selling put options; And the profit is limited-only the premium paid by the option buyer.

6. Different profit opportunities

In futures trading, hedging means that the hedger gives up the opportunity to make profits when the market price is favorable to him, while speculative trading means that he can get huge profits or suffer heavy losses. However, in option trading, because the buyer of options can exercise his right to buy or sell futures contracts, he can also give up this right. Therefore, for the buyer, the profit opportunity of option trading is relatively large. If option trading is combined with hedging trading and speculative trading, it will undoubtedly increase profit opportunities.

7. Different delivery methods

Commodities or assets traded in futures must be delivered at maturity, unless the futures contract is sold before maturity; Option trading cannot be delivered on the maturity date, which makes the option contract invalid when it expires.

Eight, the delivery price of the subject matter is different.

In futures contracts, the delivery price of the subject matter (that is, the futures price) will change at any time due to the uncertainty of the power of the supply and demand sides in the market. In the option contract, the final price of the subject matter is determined by the exchange and the trader chooses.

Nine, the number of different types of contracts

The futures price is determined by the market, and there can only be one futures price at any time, so when creating a contract type, only the delivery month is changed; Although the final price of options is determined by the exchange, at any time, there may be many contracts with different final prices, and with the different delivery months, options contracts that are several times that of futures contracts can be produced.