From the microscopic point of view, hedging is a means of operation, which is simply buying and selling. For example, if you buy a soybean contract in March and sell a soybean contract in April in the futures market, the purpose is to avoid the risk of market fluctuation, or if you want to sell a batch of goods in the future, you can buy a batch of futures to hedge the risk of spot market fluctuation, which is called hedging. If the scope is expanded a little, give an inappropriate example. Personally, I think insurance can also be regarded as a hedge against the loss of your life or property. I think the purpose of hedging is not to make a profit, but to reduce the risk caused by the fluctuation of futures prices. The purpose is to preserve value. Its cost is only the procedure of buying futures, which is much smaller than the loss caused by the risk of price fluctuation. Therefore, hedging is a very common method to avoid risks. 2. Hedge classification is intended to be a two-way operation. Economic hedging is to achieve the purpose of hedging. Hedging in import and export trade means that importers and exporters buy foreign currency in the foreign exchange market in order to avoid direct or indirect economic losses caused by foreign currency appreciation, and the purchase amount is equivalent to the foreign currency they need to pay for imported goods; Hedging in futures means that customers buy (sell) a futures contract and then sell (buy) a futures contract with the same amount as the original variety in the delivery month to offset the delivery of spot. Its main point is that the months are the same, the directions are opposite, and the amount is the same. 3. What is "hedging" and why should it be hedged? Hedging is also translated as hedging, hedging, support, top risk, hedging and hedging transactions. Pre-hedging refers to "the trading method of offsetting the price risk in spot market transactions by conducting the same kind and quantity of contracts in the futures market but with opposite trading positions" (edited by Liu Hongru, 1995). Early hedging was used in agricultural products market and foreign exchange market for real value preservation. Hedgers are generally actual producers and consumers, or people who own goods for sale in the future, or people who need to buy goods in the future, or people who collect debts in the future, or people who repay debts in the future, and so on. These people face the risk of suffering losses due to changes in commodity prices and currency prices. Hedging is a financial operation to avoid risks. The purpose is to avoid (pass on) the exposure risk in the form of futures or options, so that there is no exposure risk in its portfolio. For example, a French exporter knows that he will receive $6,543,800+when he exports a batch of cars to the United States three months later, but he doesn't know what the exchange rate of US dollars to French francs is after three months. If the dollar falls sharply, he will suffer losses. In order to avoid risks, we can short the same amount of dollars in the futures market (payment after three months), that is, lock the exchange rate, so as to avoid the risks brought by exchange rate uncertainty. Hedging can be short selling or short selling. If you already own an asset and plan to sell it in the future, you can lock in the price by shorting the asset. If you want to buy an asset in the future and are worried about its rising price, you can buy the futures of this asset now. Because the essence of the problem here is the difference between the futures price and the spot price due in the future, no one will really deliver this asset, but the difference between the futures price and the spot price due. In this sense, the sale of this asset is short selling and short selling. So what is the "hedging" of hedge funds? Take Jones, the originator of hedge funds. Jones realized that hedging is a market-neutral strategy. By establishing long positions in undervalued securities and short positions in other securities, investment capital can be effectively increased and limited resources can be used for block trading. At that time, two investment tools widely used in the market were short selling and leverage effect. Jones combined these two investment tools to create a new investment system. He divided the risk in stock investment into two categories: the risk from individual stock selection and the risk from the whole market, and tried to separate the two risks. He used some assets to maintain a basket of short stocks as a means to offset the decline in the overall market level. On the premise of controlling the market risk to a certain extent, at the same time, he used the leverage effect to amplify his gains from stock selection. The strategy is to buy a specific stock as a long position and then short other stocks. By buying those "undervalued" stocks and shorting those "overvalued" stocks, no matter what the market situation is, we are expected to profit from it. Therefore, Jones Fund's portfolio is divided into two parts with opposite nature: one part of the stock returns when the market is bullish, and the other part returns when the market falls. This is the "hedge" method of "hedge fund". Although Jones thinks that stock selection is more important than timing, he still increases or decreases the net exposure risk of his portfolio according to his own market forecast. Because the long-term trend of stock price is upward, Jones investment is generally a "net long position". What will happen after adding financial derivatives such as options? Let's give another example. If the current price of a company's stock is 150 yuan, it is estimated that it can appreciate to 170 yuan by the end of the month. The traditional way is to invest in the company's stock and pay 150 yuan. Once you make a profit in 20 yuan, the profit-cost ratio is 13.3%. However, if you use options, you can only use 5 yuan's margin (current share price) to buy a company call option with the market price of 150 yuan this month. If the company's share price rises to 170 yuan at the end of the month, you can earn 20 yuan per share, minus the 5 yuan paid by the margin, and the net profit is 15 yuan (not counting the handling fee for simplicity), that is, at the cost of 5 yuan per share. It can be seen that if derivatives are used properly, they can get more profits at lower cost, just like the lever principle in physics, and lift the heavy objects close to the fulcrum with less force at the action point far from the fulcrum. Financial economists call it leverage. In this case, if it is not for hedging (that is, it is actually not hedging), but purely for the trend of the market, gambling with leverage, once it is done right, of course, will gain huge benefits, but the risk is also great. Once you miss, the loss will be amplified by leverage. The American Long-term Capital Management Fund (LTCM) secured its own funds of 2.2 billion US dollars, with loans of 654.38+02.5 billion US dollars and total assets of over 654.38+02 billion US dollars. The market value of all kinds of securities involved in its financial products exceeds one trillion US dollars, and the leverage ratio reaches 56.8. As long as there is a risk of one thousandth, it is doomed.