Hedging involves taking a position in the futures market that is opposite to the position held in the cash or spot market.
Selling Hedge
If a businessperson buys a commodity in the cash market, he or she would then hedge that position by selling an equivalent quantity in the futures market.
Why Trade Spreads?
1. Spreads are often very reliable from the standpoint of seasonality.
2. Spread margins are generally very low or even zero. 3. Some (but not all) spreads are lower in risk than
either long or short positions. 4. There are a number of good timing indicators for
entering and exiting spreads.
Margin Requirements on Spreads
Many intracommodity spreads have extremely low margins.
This person is said to be short the cash market and so would take a long position in the futures market (be a buyer).
Conclusion:
Hedging not only protects against the possible losses from adverse price movement; it also takes away the possibility of windfall profits that can accrue as the result of favorable price moves.
March Futures Basis
November $5.30/bushel $5.47/bushel $-0.17
February $5.10/bushel $5.22/bushel $-0.12
Gain or Loss $-0.20
$-0.15
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if a stop point has been penetrated and it is important to exit the market immediately;
In other words, there is no specific margin on these spreads.
Legging In and Legging Out
A common but not necessarily wise procedure for spread entry and exit is the legging in and legging out procedure.
This is a technique that can not only complicate matters but also increase the risk of losses.
A Market Order Is Advisable
If an ideal opportunity to enter or to exit a given spread been missed;
The purchase of one futures delivery month against the sale of another futures delivery month of the same commodity;
SPREADS AND STRADDLES 套利和对冲
A spread can also apply to options. It involves buying one futures contract and selling another futures contract.
Because gains and losses occur only as the result of a change in the price difference – rather than as a result of a change in the overall level of futures prices - spreads are often considered more conservative and less risky than having an outright long or short futures position .
As the term implies, this technique involves entering a spread one side, or leg, at a time or exiting a spread one side, or leg, at a time.
Legging In and Legging Out
There are two types of spreads
1. Intra-commodity Spread 2. Intercommodity Spread
TRADING SPREADS
Profits in spread trading are made in one of three ways
Buying Hedge
The buying hedge is used by a businessperson who anticipates buying a commodity at a future date and wants protection from a possible price increase.
The Basis 基差
The difference between the futures price and the spot price is known as the basis.
Base Example
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Date
Cash
SPREADS AND STRADDLES (套利和对冲)
A spread is simply the simultaneous buying of one contract and selling of another.
The price difference between two related markets or commodities.
Chapter 7 Hedging with Spreads
What is hedging?
When a businessperson uses the futures market to protect against adverse price movements, the process is called hedging.
The purpose is to profit from an unexpected
change in the relationship between the purchase
price of one and the selling price of the other.
SPREADS AND STRADDLES 套利和对冲