How can stock index futures be used for hedging?

How can stock index futures be used for hedging?

the nature of stock index futures

As a financial instrument which is used to reduce risk for invstors, stock index futures have some characteristics:

1 Stock index futures contracts are based on the share index.

2 Stock index futures contracts should stand for those indexes which are authoritative as well as representative.

3 The price of Stock index futures contracts is denoted by "points" which are used for share index.

4 Stock index futures contracts is a kind of futures contracts which is in terms of cash transaction

Future Hedge, it means in order to lock spot purchase costs or profits in the futures market to establish a certain amount of the cash and futures positions in the opposite direction of the position. To use the futures-related losses to offset or compensate for the spot transaction on the profit and loss, so that to avoid price fluctuation risk.

Stock market of Brussels

Stock-car-aldershot

Stocks

There are two aspects on the principle of hedging:

Firstly, the same subject matter of the futures price keeps identical with the trend of spot price. Because the specific commodities or financial assets will be subject to the same economic factors and constraints in the same market environment, so, generally speaking, the two markets' price has the same trend of changes. The stock index futures contracts corresponds the corresponding spot index, so they are basically the same price.

Secondly, as the futures contract expiry date drew near, the futures prices and spot prices will be consistent convergence.

2. The strategy of hedging.

The purpose of hedge is in the stock market, the investors may be faced with tow risks. One is unsystematic risk, another one is systematic risk. The stock index is on behalf of the market, so its risk...