Calculation method of hedging
The calculation formula of hedging is:
Quantity of stock index futures contracts required for hedging = spot quantity ÷ contract value;
contract value of stock index futures = futures index × contract multiplier
How to understand hedging?
hedging, also known as hedging trade, refers to the fact that traders sell (or buy) the same number of futures trading contracts in the futures exchange as hedging while buying (or selling) the actual goods. It is an act of temporarily replacing physical transactions with futures transactions in order to avoid or reduce the losses caused by adverse price changes.
basic characteristics: at a certain point in time, the same kind of goods are bought and sold in the spot market and the futures market in the same amount but in the opposite direction, that is, the same amount of futures are sold or bought in the futures market at the same time of buying or selling the real goods. After a period of time, when the price changes make a profit or loss in spot trading, the loss in futures trading can be offset or compensated. Thus, a hedging mechanism is established between "present" and "period" and between short-term and long-term to minimize the price risk.
theoretical basis: the trend of spot and futures markets is similar (under normal market conditions), because these two markets are affected by the same supply and demand relationship, their prices rise and fall together; However, due to the opposite operation in these two markets, the profit and loss are opposite, and the profit of the futures market can make up for the loss of the spot market, or the appreciation of the spot market is offset by the loss of the futures market. The trading principles of hedging are as follows:
1. The principle of opposite trading direction;
2. the principle of the same kind of goods;
3. The principle of equal quantity of commodities;
4. The principle of same or similar months.
hedging transactions by enterprises using the futures market are actually a kind of venture capital behavior aimed at avoiding the risk of spot trading, which is an operation combined with spot trading.