How exactly is hedging profitable?

Hedging is profitable in the following ways:

Hedging refers to an investment that purposely reduces the risk of another investment. It is a way of reducing business risk while still making a profit on the investment. Generally hedging involves making two trades at the same time that are correlated, in opposite directions, in equal amounts, and with offsetting gains and losses. The market correlation refers to the market supply and demand affecting the price of two commodities there is homogeneity, supply and demand changes, at the same time, will affect the price of two commodities, and the direction of price change is generally the same.

Hedging, that is, traders in the futures market after the establishment of a position, most of them are not through the delivery (that is, settlement of the spot) to end the transaction, but through the hedging of the end. After buying a position, you can sell the same futures contract to discharge the fulfillment responsibility; sell a position, you can buy the same futures contract to discharge the fulfillment responsibility.

Expanded Information

1, arbitrage strategy: the most traditional hedging strategy

Arbitrage strategy, including convertible bond arbitrage, stock index futures futures cash arbitrage, inter-period arbitrage, ETF arbitrage, etc., is the most traditional hedging strategy. The essence of financial product pricing is the use of the "one price principle", that is, when the pricing difference between the different forms of expression of the same product, buy relatively undervalued varieties, sell relatively overvalued varieties to obtain the middle of the spread income. Therefore, the arbitrage strategy to bear the risk is minimal, more some strategies are called "risk-free arbitrage".

2, index-enhanced portfolio + index futures short rolling annual Alpha distribution

Based on the portfolio of 90 financing bond underlying statistical arbitrage performance

3, Alpha strategy: change the relative return to absolute return

4, neutral strategy: from the elimination of Beta dimension

Market-neutral strategy can be divided into two categories: statistical arbitrage and fundamentally neutral. as statistical arbitrage and fundamentally neutral, trying to construct a long-short portfolio that avoids risk exposure while pursuing absolute returns. Long and short positions are no longer built in isolation or even synchronized. Long and short positions are strictly matched to construct a market-neutral portfolio, so that their returns are all derived from stock selection and are independent of market direction - i.e., the pursuit of absolute return (Alpha) without exposure to market risk (Beta).

Baidu Encyclopedia - Hedging