The purpose of hedging is to avoid price risk.

One of the basic economic functions of the futures market is to provide a price risk management mechanism. In order to avoid price risk, the most commonly used means is hedging. The basic purpose of futures trading is to transfer the risk of a commodity from producers and users to speculators (futures traders). When the spot dealer uses the futures market to offset the reverse movement of the spot market price, this process is called hedging.

Hedging is also translated as "hedging transaction". Its basic practice is to buy or sell commodity futures contracts with the same number of transactions but opposite trading positions in the spot market, so as to hedge and close positions and settle the profits or losses brought by futures trading at a certain time in the future, so as to compensate or offset the actual price risks or interests brought about by price changes in the spot market and stabilize the economic interests of traders at a certain level.

In the whole process from production, processing, storage to sales, commodity prices always fluctuate, and the changing trend is difficult to predict. Therefore, there may be risks brought by price fluctuations in every link of commodity production and circulation. Therefore, in any economic activity, hedging is an effective way to protect the economic interests of participants.

Hedging can avoid price risk, and its basic principle lies in:

First, in the process of futures trading, although the change range of futures price and spot price will not be exactly the same, the change trend is basically the same. That is, when the spot price of a specific commodity tends to rise, its futures price tends to rise, and vice versa. This is because although the futures market and the spot market are two independent markets, the main influencing factors of futures prices and spot prices are the same for specific commodities. In this way, the rise and fall of spot market prices will also affect the rise and fall of futures market prices in the same direction. Hedgers can achieve the function of hedging by doing the opposite transaction in the futures market to the spot market, thus stabilizing the price at the target level.

Second, the spot price and the futures price will not only change in the same direction, but also be roughly equal or merged when the contract expires. This is because the futures price is usually higher than the spot price, and all the expenses for storing the goods until the delivery date are included in the futures price. When the contract approaches the delivery date, these expenses will gradually decrease or even disappear completely, so the two price determinants are actually similar. This is the principle of market trend convergence between futures market and spot market.

Old and immortal; Of course, the futures market is an independent market different from the spot market after all, and it will also be affected by some other factors. Therefore, the fluctuation time and range of futures prices are not necessarily the same as spot prices. In addition, there is marketing unit in the futures market, and the number of operations in the two markets is often not equal, which means that the hedger may gain additional profits or losses when the profit and loss break even, so that his trading behavior still has certain risks. So hedging is not a once-and-for-all thing.

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