Futures Trading: How Hedging Preserves Value?
Hedging also known as hedging transactions, "hedging" and so on. It is a method of buying and selling that minimizes the risk of loss caused by price fluctuations. For hedging, at the same time as before or after buying or selling actual commodities, an equal number of futures contracts are sold or bought on the commodity exchange as a hedge, since the price movements of the futures market and the spot market are basically the same, so actual The loss (inventory) of the spot market can be offset or written off from the surplus (loss) of the futures market.
For example, a merchant ordered a batch of raw rubber from foreign countries in January at a price of 300 US dollars per metric ton, and it was stipulated that delivery should be made in April. In view of the large ups and downs of raw rubber prices, for the purpose of preserving the value, the businessman signed an import contract, throwing an equal amount of futures contracts at the commodity exchange at a price of $306 per metric ton. Later, raw rubber prices fell. After the raw rubber arrived in April, the merchant sold the batch of raw rubber to the manufacturer at a price of 290 US dollars per metric ton. He suffered a loss of 10 US dollars per metric ton.
At the same time, the futures contract price of the commodity futures exchange also fell to 296 US dollars per metric ton. After the merchant settled the futures contract by purchasing and closing the position, it made a profit of 10 US dollars per metric ton, and the two were offset. The businessman avoided the shortage of raw rubber. Loss caused by falling prices. In this case, if the rubber price rises, the trader will lose money on raw rubber futures, but it will benefit from raw rubber spot trading. Hedging has been widely adopted in transactions such as forward foreign exchange and foreign exchange futures.
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