On the stock index futures in hedging

Abstract: Since this year, although the stock market good news, but more than expected due to the economic downturn, but the stock market is still hovering at the bottom of the market shocks in the case of China's stock market to the lack of short-mechanism, how to use stock index futures to hedge a large number of investment those issues of concern. Article first elaborated the concept of hedging, the role and principles, and introduces the concept of stock index futures and stock trading distinction on this basis to explain the basic principles of the stock index futures hedging and hedging strategies to help investors achieve the purpose of risk aversion.

Keywords: hedging, stock index futures, strategy

First, Hedging Overview

(A hedge concept

Hedging hedgers during spot market transactions, to buy or sell in the futures market and the spot market varieties of the same, the same number of transactions in the opposite direction futures contracts to at a certain time in the future by selling or buying futures contracts in order to circumvent the purpose of the spot market price fluctuations in the price of risk.

(B hedging

Avoid price risk, help enterprises to lock the cost of procurement and product sales prices.

Companies to hedge, largely to avoid the impact of price fluctuations on its cost and profit. Companies in order to cope with the risk of rising raw material prices, buying futures contracts once the prices of raw materials, enterprises can through the futures market earnings offset spot market due to the losses brought about by the rising prices of raw materials, as locking the cost of doing business. Similarly, when firms expect prices to sell the underlying futures contracts to offset the loss of the spot market to the futures market earnings, thus locking the products on sale price. Seen in this light, the enterprise through futures hedging strategy to achieve lock-in costs and selling prices, to avoid fluctuations in the market price of the purpose to cause losses to the enterprise.

2. Leveraged transactions

Futures markets, margin trading system the hedgers can with a small amount of margin, several times or several times margin commodity trading, with fewer financial resources which companies can enter the market frequently, in order to avoid the capital stock a large number crowding situation, and the corresponding storage cost savings, and reduce operating costs. example, when firms expect prices if the companies do not conduct futures trading prior need to spend a lot of capital goods purchased in order to enjoy the benefits of higher commodity prices or avoid the raw materials the risk of price increases, but will take up corporate liquidity. leveraged transactions can be achieved if companies choose to adopt the way of futures, to deduct, a small amount of money to get significant amounts of revenue.

3. Improve the liquidity of the futures market

Hedging and speculation as to increase market liquidity, and hedgers are mainly the main force of the futures market and the main supporting speculation able to bring a large number of transactions in a short period of time, increase the liquidity of the market. Such transactions are often short-term, unstable trading. demand the hedgers at any time hedge, they become active marketplace through continuous, stable trading.

4. Hedging added to stabilize the market price fluctuations, when low commodity prices, hedgers to buy the commodity futures, to procure commodity prices return to a reasonable level, high commodity prices, hedging sell out the commodity futures contracts and commodity prices down to a reasonable level, the close spot market price of the futures market also will return to a reasonable level. Thus, by the operation of the futures market hedging can indirectly affect the cash market to avoid commodity prices especially the frequent fluctuation of commodity prices.

5 price discovery

And speculators, hedgers generally are actively involved in the spot market, their price expectations realistic response to the spot market price is expected to So when enough hedgers added to the futures market and actively participate in the makes futures markets more closely linked with the futures market prices, futures prices more truly reflect spot market prices, futures market price discovery.

(C hedging principle

1. Varieties of the same or similar principles

Futures prices for the same or similar varieties are more consistent with the trend of the stock price, the maturity of the contract price is more consistent, hedgers to hedge transactions, futures varieties you want to hedge same spot varieties or as similar as possible. futures and spot higher the similarity, convergence of prices, the stronger, the better the hedging effect or basis risk may appear to influence the effect of hedging.

2 month of the same or similar principle.

Hedgers should choose the futures contracts based on the spot held by time interval, the maturity of the futures should be possible to hold to maturity and spot the same or similar cause not to avoid the time inconsistency due between futures and spot necessary exposure. increasingly in the same hedging principle is the price of the futures market and the spot market price maturity, more to the maturity date, the price of the futures market and the spot market price is more consistent. performing hedge hedgers preserve and increase the operating time, the selection of the delivery month of the futures contract plan with spot market trading hours should be as consistent as possible or near.

3. Direction contrary to the principles of

The hedgers in hedging transactions, the spot market and the futures market, the market direction must be opposite, that the spot market is long, the futures market must be short, or the stock market is short, the futures market is long, otherwise, it is speculative rather than hedging huge exposure, because of the presence of transaction leverage the same or similar goods in the two market price movements, bound to be a market profit and loss in another market and realized gains and losses offset so as to achieve the purpose of hedging that locked the commodity market prices.

4. Roughly the same number of principle

Carrying out hedging transactions, the need to preserve and increase the value of the commodity or stock portfolio should be equal to the value of the futures contracts traded on the futures market, so as to ensure both market gains and losses, was equal in fact, hedging operations will traded only in accordance with a multiple of the nominal value of the contract, it is not possible to precisely achieve consistent value of the spot market and the futures market, but it should be possible to ensure that roughly the same number of two markets.

Second, the stock index futures Overview

(A stock index futures concept

Stock index futures are standardized futures contracts, refers to the stock price index of the subject matter involved in the transaction the parties have agreed on a specific date in the future, in accordance with the prior agreement of the stock price index, the trading activities of the Index.

The difference between (two stock index futures and stock

1 expiration of stock index futures delivery, stock and unlimited holds

Bought the stock, the investor can decide the holding period of the stock, in theory, as long as the company does not dissolve, investors unlimited holding company stock, however, the stock index futures have a fixed maturity date, the investor in maturity to close out or delivery.

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Futures contracts are traded on margin, the daily settlement system

Stock investors to buy shares must be full bid, and capital gains can be achieved only when the stock again sold stock index futures is traded on margin deposit can be paid in accordance with a certain percentage of the contract. Margin trading system allows investors huge leveraged income, on the other hand it also brings huge risks in order to prevent the occurrence of default risk, stock index futures daily settlement system, the daily settlement gains and losses, investors can every day earnings set aside, but the losses have to make up the margin, investors can not make up will be liquidated.

Futures contracts can achieve short transactions

Stock index futures can buy and then sell, can sell to buy another, and that two-way trade. Therefore, when investors expect the stock market fell, can sell stock index futures, short trading, shares fell after buying. stock investors can only do more, can only profit when the price rises, and the lack of investment opportunities in the expected stock price declines or only loss.

Index futures, cash settlement

Futures market is to establish the basis of the stock market derivatives market, but the futures deliverable in the form of cash, only to calculate the gain or loss in the Closing without metastasis kind, in the futures contract delivery period that investors do not have to buy or throw stock to fulfill their contractual obligations, which avoids the crowded city "phenomenon in the stock market of the delivery period.

Third, the stock index futures to hedge the basic principles and strategies

(A stock index futures to hedge the basic principles of

The stock index futures to hedge the basic principle is: the price movements of the stock index futures and stock index spot price trend is consistent with the approaching maturity of futures contracts and stock index futures, stock index spot price and become more consistent, although the stock market the independent futures market, but due to the same economic factors that affect the price, and therefore both have the same trend of price movements. Lock in prices, the purpose of the risk-averse and thus can be achieved by two opposite market transactions and stock index futures, cash clearing and settlement, due to arbitrage the existence of the phenomenon, the stock index futures prices must spot price close to the contractual maturity date. Hedgers in the market of two highly related to the reverse operation, would make a breakeven, the purpose of risk-averse.

(A long hedge and short hedging

Stock index futures hedging bulls intend to hold stock investors expected stock prices to buy the corresponding futures contracts trading behavior in the future lock will want to buy the stock price, to avoid the risk of stock prices when the following situations occurs, investors may use stock index futures bulls hedging strategy: When investors expect future receive large sums of cash, and ready to put money into the stock market, investors holding large amounts of cash, ready to buy a basket of stocks, in order to prevent funds inroads into the push up the stock price, in batches gradually buy stocks, worried about the future stock price increases, the investor holds a stock or stock index put options, once the stock price rises, investors faced huge losses, investors for margin trading to worry about buying stocks returned, the shares rose.

Stock index futures short hedging the stock bulls worry about future stock price fell and sell the behavior of the corresponding stock index futures contracts, lock stock selling price, to avoid the risk fell when the following situations occur, investors will adopt a stock index the futures hedging short: long-term holdings of major shareholders bearish market outlook, but do not want to sell the stock to lose the status of major shareholders, then can choose to sell stock index futures contracts to hedge against price declines risks, investors holding stocks in the case of the stock market as a whole is expected to decline, it is expected that held the stock fell less than the broader market, the use of short hedging, the excess returns for holding stocks, and to avoid systemic risk.

(C negative hedging and active hedging

Negative hedging objective of minimizing the risk, is equal to the number in the futures market and the spot market, the opposite direction of the operation. Main aim of such traders avoid the systemic risk faced by the stock market. Negative hedging is not involved in the spot market forecast does not predict stock market trends to reap excessive profits, but by locking the stock price of the spot market, to avoid the risk of the stock price.

Actively hedging target to maximize revenue, stock future trend expected to select by stock index futures hedging to avoid market systemic risk, systemic risk comes, investors take an active hedging measures to circumvent the system of equity portfolio risk, trading futures positions in the futures market will be open after the release of the system risk, is not the the corresponding reverse stock trading that is actively hedging strategies to hedge just in a period of time, recovery stocks after the release of the systemic risk, systemic risk exposure.

IV Conclusion

Lock stock price in the case of the stock market falling, investors can use stock index futures to hedge, to avoid the stock market fell sharply to bring losses to investors. Different risk tolerance, investors can choose different hedging strategies, but must follow the principle of consistent with the type, duration consistent, consistent with the number of opposite direction, otherwise futures speculation rather than hedging the trading leverage the presence of speculators facing huge investment risk hedging principle as long as investors follow You can use stock index futures hedging to avoid the stock price systemic risk purposes.


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He Xiaotong. Stock index futures hedging strategy theory and applied research. Xiamen University, 2008.

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Wang Xin index futures hedging portfolio management [D]., University of Science and Technology, 2009.

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