How to prevent liquidity risk in hedging?
Liquidity risk mainly includes liquidity risk and capital risk. (1) Liquidity risk hedging needs to establish a hedging position at the beginning of hedging and close the hedging position at the end of hedging. Liquidity risk refers to the risk that the selected futures contract cannot open or close the position at a reasonable price in time. Usually, the liquidity of stock index futures market is measured by the breadth and depth of the market. Breadth refers to the ability of the market to meet the trading needs of investors at a given price level. If both buyers and sellers can get the required trading volume at a given price level, then the market is breadth; If both buyers and sellers are limited by trading volume at a given price level, then the market is narrow. Depth refers to the market's ability to accept the demand of block trading. If increasing a small amount of demand will cause the market price to rise or fall sharply, then this market lacks depth; If a large number of additional demand does not have much impact on the market price, then this market is deep. In a highly liquid market, the market price is more stable and reasonable. In order to avoid liquidity risk, we should try to choose the recent contract with relatively large trading volume as the hedging contract. In addition, when stock index futures stop trading due to price limit or special events in the market, the futures contracts used for hedging may not be closed in time, which may also lead to liquidity risk, thus affecting the hedging effect. (2) The size of capital risk In the process of hedging, the price of futures contracts is always in a state of fluctuation, and sometimes the market may be in the opposite direction of investors' expectations; Moreover, the margin ratio may also face adjustment, so the requirements for trading margin are also changing. When the fund balance in the investor's margin account cannot meet the trading margin requirements, the hedging position held by the investor may face the risk of being forced to close the position, which directly leads to the failure of the hedging plan. Therefore, even in hedging transactions, we should do a good job in fund management to prevent additional margin demand from time to time. In addition, in the hedging operation, investors should abide by the relevant provisions in the Measures for the Administration of Hedging of CICC, otherwise they may face the risk of forced liquidation of futures positions that exceed the spot matching requirements and frequently open positions. (provided by CICC)