Futures Investment - Theory and Practice

Author: Zhu Guohua
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Publishing Time: Not Available
Features: In 2005, the international copper market experienced significant fluctuations, which sparked discussions in the domestic futures industry and the economic theory community regarding a series of topics, including the functions of the futures market, institutional design, development paths, regulatory methods, risk management, and trading models. During these discussions, it was widely agreed that commodity futures possess two attributes: one is their commodity attribute, and the other is their financial attribute. Moreover, as the international futures market continues to develop, the financial attribute of commodity futures will become increasingly prominent.
The financial attribute of commodity futures stems from the inherent characteristics of the futures market. Standardized contracts, the margin system, and the settlement system reveal the inherent financial nature of the futures market. The establishment of the hedging mechanism gives futures contracts capital security characteristics, and the fulfillment of futures contracts through delivery also exhibits certain features of commercial bills. The limit-up/limit-down system, the forced liquidation system, and the daily settlement system, along with the margin system, together form a credit system that enables the effective functioning of monetary financing in the futures market. Due to this credit system and the function of promoting monetary financing, the futures market possesses the fundamental attributes or characteristics of a financial market. Hedging is a trading activity that can be settled by hedging and liquidation. The hedger achieves two processes: hedging and liquidation in the futures market and spot buying and selling in the spot market. Therefore, hedging transactions also reflect the financial attribute of commodity futures.
The emphasis on the attributes of commodity futures, particularly their financial attribute, reflects the gradual improvement in people's understanding of the functions of the futures market and also reflects the final positioning of its core function. Unlike traditional spot markets, where the core function lies in efficiently allocating limited resources through prices to enhance and maximize overall social welfare, the core function of the futures market lies in efficiently allocating risks through futures prices. By transferring risks from individuals with lower risk tolerance to those with higher risk tolerance, it promotes the allocation of resources in corresponding spot markets. This is also the function of the entire derivatives market.
Forward contracts, futures, options, and swaps are the four fundamental instruments of the derivatives market and are indispensable components of the market. On an international scale, futures and options, along with foreign exchange, stocks, bonds, gold, and other markets, have together formed a vast and comprehensive capital market system. In this system, no market can operate in isolation from the others. China's futures market has only a history of 15 years, and options and swaps have not yet been introduced. The risk management and risk control systems are not. Therefore, we believe that efforts to develop the futures market and promote the development of other derivatives are essentially aimed at improving the entire risk allocation system. A domestic futures market lacking options and swaps will clearly suffer significant inefficiencies in risk allocation. From another perspective, if the goal is simply to use futures to hedge risks, the effect will not be very significant, as a modern, comprehensive risk hedging system should include futures, options, and swaps in the derivatives market. A complete risk hedging strategy should not merely contain...