The development of hedging

On the basis of practice and development, the traditional hedging theory has formed a new theory, made up for some shortcomings of the original theory and made a new breakthrough. Johnson and Ederington proposed earlier to use Markowitz's portfolio investment theory to explain hedging. It is considered that the hedging ratio in the futures market can be selected, and the optimal hedging ratio depends on the trading purpose of hedging and the correlation between the spot market and the futures market price. If hedging is understood from the perspective of portfolio investment, the futures market plays the role of "risk management" rather than "risk transfer". The optimal hedging ratio is the quotient of the standard deviation of spot price change and the standard deviation of futures price change multiplied by their correlation coefficient.