For example, in order to reduce the risk of falling crop prices at harvest, farmers sell future crops at a fixed price before harvest. Readers who subscribe to magazines for three years instead of two years are hedging the risk that the price of magazines may rise. Of course, if the price of the magazine drops, the reader will give up the potential income, because the subscription fee he pays is higher than the annual subscription fee he pays.
The basic characteristics of hedging: buying and selling the same commodity in the spot market and the futures market at the same time, that is, selling or buying the same amount of futures in the futures market while buying or selling the real thing. 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.
Theoretical basis of hedging: 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, and their prices rise and fall together; However, due to the opposite operation of these two markets, the profit and loss are also opposite, and the profit of the futures market can make up for the loss of the spot market.
The trading principles of hedging are as follows:
1. The principle of opposite transaction direction;
2. The principle of similar goods;
3. The principle of equal quantity of commodities;
4. The same or similar principles.
In fact, hedging in the futures market is a kind of venture capital behavior aimed at avoiding the risk of spot trading, and it is an operation combined with spot trading.