Classic Hedging Operation Case

The original purpose of futures was to provide physical businesses with a hedging channel to avoid price fluctuation risks.

For example, apple growers lock in selling prices, and gold processing companies lock in raw material costs.

Speculators inject liquidity into the market, solving the counterparty problem for hedgers.

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What is hedging?

To put it simply: it can be understood as adding “insurance” to your inventory or future procurement needs.

Scenario 1: You have 800 tons of iron ore in stock and are worried about a future price decline. So, you sell (short) 800 tons of iron ore futures contracts in the futures market.

If the spot price really drops next week, you earn less from selling the physical iron ore, but your short futures position profits due to the price decline. The gains and losses from spot and futures offset each other, keeping your total assets stable.

Scenario 2: You have built a new house but haven’t purchased the glass yet, and you’re worried about rising glass prices squeezing your profit.

So, you buy (go long) a corresponding amount of glass futures contracts in the futures market.

If the glass spot price rises next month, your purchase cost increases, but your long futures position profits from the price increase. The offsetting gains and losses lock in your procurement cost in advance.

In summary, it’s about establishing a position in the futures market opposite and proportionate to the spot market.

Using profits from one market to hedge losses in another, ultimately locking in costs, protecting profits, and avoiding price risks.

Two core hedging strategies:

1. Short Hedge — Hedging against falling spot prices

Applicable to traders and sellers with inventory, to prevent inventory devaluation and lock in sales profits.

2. Long Hedge — Hedging against rising spot prices

Applicable to traders and buyers who need to procure in the future, to prevent rising raw material costs and lock in purchase costs.

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01
Success Case
A domestic medium-sized steel trading exporter, Kyushu Materials — Container Shipping Index (European route) futures, hedged against the surge in Red Sea shipping rates from January to March 2025.

They signed an export contract for H-shaped steel with a Saudi customer, scheduled to ship from Shanghai to Jeddah in mid-March.

To cope with worsening Red Sea conditions and Houthi attacks on ships, global shipping companies rerouted around the Cape of Good Hope, causing freight costs to skyrocket and eroding profits.

Hedging process: On January 7, 2025, at a price of 1520.2 points, they bought container shipping index (European route) futures EC2506.

This locked in future transportation costs. On March 13, 2025, when spot freight rates surged, they closed the futures position at 2102.9 points.

The spot freight cost increased by 185,600 yuan, while the futures position gained 171,700 yuan. After hedging, the net loss was only 12,900 yuan, protecting 90% of the order’s profit.

Data source: Wind Financial Terminal (European route price trend Jan-Mar 2025)

Key points of hedging:

• Do not bet on market direction, only cover the risk exposure of a single order;
• Although Shanghai to Jeddah and the Eurasian main route are not identical, freight rates are highly correlated, so risk can still be effectively hedged;
• The hedging team and trading team make decisions collaboratively, without subjective over- or under-hedging.

02
Success Case
A leading domestic dairy company relying 100% on New Zealand imports for full-fat and skim milk powder — Cross-border Revenue Swap

From 2025 to early 2026, hedging against rising New Zealand milk powder prices due to droughts and increased global dairy demand, which significantly raised procurement costs.

Hedging process: By linking to NZX dairy futures through a cross-border revenue swap, the company pays RMB interest, while the broker pays floating income linked to NZX dairy futures.

As milk powder prices rise, NZX dairy futures floating income increases, offsetting the rising procurement costs.

From late 2025 to early 2026, spot prices for NZX full-fat milk powder increased over 25%, while the hedge covered 80% of the costs, boosting gross profit margin by 30%.

Key points of hedging:

• Hedge ratio = quantity of spot consumption, without excessive leverage;
• Using revenue swaps avoids the need for the company to directly participate in foreign futures markets, foreign exchange, and risk control thresholds;
• Not a one-time emergency hedge, but a seasonal rolling hedge to smooth out annual cost fluctuations.

03
Failure Case
The world’s largest nickel producer, Tsingshan Holding — LME nickel futures, March 2022. Tsingshan mainly produces high-grade nickel from Indonesia for stainless steel.

To hedge against falling nickel prices, they shorted nickel futures on the LME.

Hedging process: After the Russia-Ukraine conflict broke out, European electrolytic nickel supply was interrupted, causing prices to spike to a maximum of $101,000 per ton (later canceled by the exchange).

However, LME delivery is for electrolytic nickel, while Tsingshan only holds high-grade nickel, which cannot be delivered. Tsingshan held over 200,000 tons of short futures positions and faced a short squeeze.

LME temporarily suspended trading and canceled some trades. Tsingshan attempted to swap electrolytic nickel warrants and negotiated extensions, but suffered losses exceeding 10 billion yuan.

Data source: Wind Financial Terminal (London nickel price trend Jan-Mar 2022)

Hedging lessons:

• Hedging high-grade nickel with pure nickel futures can completely disconnect in extreme cases;
• The hedge position far exceeds annual capacity, essentially speculative shorting;
• Facing short squeezes and liquidity shortages, trading rules changed with no stop-loss or emergency plan.

04
Failure Case
Inner Mongolia Knight Dairy — ICE raw sugar futures, 2024-2025. To hedge against falling sugar prices, they shorted ICE raw sugar futures.

Hedging process: Actual trading far exceeded their physical output and sales, with large unilateral short positions in ICE raw sugar futures.

In late 2024, global sugar inventories decreased, and ICE raw sugar surged over 35%, with no effective stop-loss or control.

After losses widened, they increased positions against the trend, losing over 50 million yuan. In July 2025, the CSRC filed a case, stock prices plummeted, and executives faced accountability.

Hedging lessons:

• Treat hedging as a profit tool for speculation;
• No approval, no stop-loss, adding to positions against the trend, single-person decision-making;
• Ignoring volatility, night trading, and exchange rate risks.

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1. For foreign markets, the preferred hedging contracts are those fully aligned with the spot, such as London copper, US soybeans, WTI crude oil;
2. Hedge ratio ≤100%, never exceeding the spot exposure, with 80%-90% being most stable;
3. In extreme market conditions, face black swan events and short squeezes with unconditional stop-loss/stop-profit execution;
4. Trade, hedging, and risk control should be separated, and decision-making should not be centralized in one person.