(1) basic transaction

In practice, hedging is not to buy spot and throw futures mechanically, but more importantly, to judge the strong and weak relationship between spot and futures to flexibly adjust the current position, so as to avoid risks and gain income. In essence, the relationship between spot strength and futures strength is the judgment of basis. Basis refers to the difference between the spot price and futures price of a specific variety at a specific time and place. Its calculation method is the spot price minus the futures price. If the spot price is higher than the futures price, the basis is positive; If the spot price is lower than the futures price, the basis is negative.

The connotation of basis is determined by the difference between transportation cost and holding cost between spot market and futures market. That is to say, the basis contains two components-time and space, and the transportation cost reflects the spatial factor between the spot market and the futures market, which determines the fundamental reason why the basis in two different places is different at the same time. Holding cost reflects the time factor between spot market and futures market, that is, the holding cost between two different delivery months, which reflects the cost of unique or stored goods from one time period to another, including storage cost, interest and insurance premium.

It mainly includes the general relationship between supply and demand of commodities, the relationship between supply and demand of substitute commodities and their relative prices, the composition of transportation prices, the changes in the quality, delivery date and holding cost of commodities, government policies, wars and turmoil, economic cycle fluctuations and economic changes, and the influence of speculative psychology.

For the hedgers in futures trading, it is very important to understand the various changes of basis, because the spot price and futures price tend to be consistent when the futures contract expires, and the basis changes regularly and seasonally before the expiration. Therefore, traders have the ability to analyze the changes of basis in the past to predict that basis may be strengthened or weakened, so as to decide whether they are buyers or sellers, sign contracts or close positions, and reduce the risk of price fluctuations through the futures market.

Basis trading means that buyers and sellers agree to use the futures price of a month selected by one party as the pricing basis to buy and sell the spot at a price higher or lower than the futures price. They can ignore the changeable spot price and trade directly on the basis agreed by both parties. The value hedging of basis trading is an act of using the basis trading method to make profits by using the principle of buying wide and selling narrow when the basis changes irregularly.

(2) The economic principle of hedging.

Hedging can avoid price risk, because the futures market has two basic economic principles.

Convergence principle

The principle of convergence means that the futures price trend and spot price trend of the same commodity tend to be the same or basically the same.

The futures price and spot price of the same variety and the same subject matter are influenced and restricted by the same economic factors at the same time and space. Therefore, in general, the price trends and directions of the two markets are the same, but the price fluctuations may be different. Hedging is to take advantage of this price convergence relationship between the two markets, and conduct transactions in opposite directions in the futures market and the spot market at the same time, so as to make up for the losses in the other market with the profits of one market, thus avoiding price risks and locking in production costs and operating profits.

Chemotaxis principle

The convergence principle means that when the futures contract approaches the due delivery, under the action of arbitrage trading, the futures price and spot price gradually converge and tend to be consistent.

The delivery system in the futures market stipulates that futures contracts must be delivered in kind or in cash when they expire. If the futures price is inconsistent with the spot price at the time of delivery, there will be arbitrage opportunities between the two markets, that is, buying low-priced spot and selling it at a high price in the futures market, or reselling the delivered low-priced futures at a high price in the spot market. The arbitrage behavior of many traders buying low and selling high eventually narrowed the difference between futures prices and spot prices until they became insignificant and tended to be consistent.

From the above two principles, we can see that successful futures varieties and futures markets must be conducive to the realization of hedging, futures prices of trading varieties must be positively related to spot prices, and trading rules and delivery rules must be conducive to physical delivery and arbitrage.

Second, the operating principles of hedging

(1) same or similar variety principle

This principle requires investors to choose the same or as close as possible to the spot variety to be hedged when hedging; Only in this way can the consistency of price trends between the spot market and the futures market be guaranteed to the greatest extent.

(2) the principle of the same or similar month

This principle requires investors to choose the delivery month of futures contracts and the proposed trading time in the spot market as much as possible when hedging.

(3) the opposite principle

This principle requires investors to buy and sell in the spot market and futures market in opposite directions when implementing hedging operations. Because the price trends of the same (similar) commodity in the two markets are in the same direction, it is bound to make a profit in one market and lose money in the other market, thus achieving the purpose of maintaining value.

(4) the principle of equivalence

This principle requires that when investors hedge, the number of commodities specified in the contract of the selected futures varieties must be equivalent to the number of commodities to be hedged in the spot market; Only in this way can the profit (loss) of one market be equal to or close to the loss (profit) of another market, thus improving the hedging effect.