1. What Is Hedge Mode?
The Hedge Mode allows users to long and short positions on the same contract at the same time in cross margin mode. With positions of the same amount, the profit of a position offsets the loss of the other (or vice versa), thus achieving the purpose of locking in profits or losses.
2. Full Hedge and Partial Hedge
3.1 Full Hedge
Full hedge means that the position amount of the long position and the short position of the same asset is exactly the same. Hedged positions will not be liquidated in normal circumstances, but could happen in extreme scenarios. This is because the unrealized profit of one position can be used to cover the unrealized loss of the other. Full hedge has the following main functions on the user's end:
1. Price fluctuations will not increase the risk of forced liquidation of the contract.
2. Price fluctuations will not affect account funds.
Examples (without taking trading fees into account):
The user's initial account balance is 10,000 USDT. In cross margin mode, a long position is opened for 2 BTC with 10x leverage when the BTC/USDT price is 10,000 USDT. The user's position and account conditions at this time are as follows (assuming the maintenance margin rate is 0.4%, and the taker fee rate is 0.05%).
Initial margin of the long position = Average position price * amount / leverage = 10,000 * 2 / 10 = 2,000
Account available margin = Balance - all position margins - frozen assets + all unrealized PnL of cross margin positions = 10,000 - 2,000 - 0 + 0 = 8,000
Position risk under cross margin mode = (The combined maintenance margin of all cross margin positions + position closing fees of all cross margin positions) / (balance - all margins used in isolated margin positions - frozen assets + all unrealized PnL of cross margin positions) = (10,000*2*0.4% + 10,000*2*0.05%) / (10,000 - 0 - 0 + 0) = 0.9%
A loss will incur if the BTC price drops to 9,000 USDT. The user's position and account conditions at this time are as follows.
Unrealized PnL in the long position = (Market price - average position price) * amount = (9,000 - 10,000) * 2 = -2,000
Account available margin = Balance - all position margins - frozen assets + all unrealized PnL of cross margin positions = 10,000 - 2,000 - 0 - 2,000 = 6,000
Position risk under cross margin mode = (The combined maintenance margin of all cross margin positions + position closing fees of all cross margin positions) / (balance - all margins used in isolated margin positions - frozen assets + all unrealized PnL of cross margin positions) = (9,000*2*0.4% + 9,000*2*0.05%) / (10,000 - 0 - 0 - 2,000) = 1.01%
At this point, the user decides to open a short position for 2 BTC at 9,000 USDT to hedge the loss of -2,000 USDT. The user's position and account conditions are as follows.
Initial margin of the long position = Average position price * amount / leverage = 10,000 * 2 / 10 = 2,000
Initial margin of the short position = Average position price * amount / leverage = 9,000 * 2 / 10 = 1,800
Account available margin = Balance - all position margins - frozen assets + all unrealized PnL of cross margin positions = 10,000 - 3,800 - 0 - 2,000 = 4,200
Position risk under cross margin mode = (The combined maintenance margin of all cross margin positions + position closing fees of all cross margin positions) / (balance - all margins used in isolated margin positions - frozen assets + all unrealized PnL of cross margin positions) = [(2*9,000*0.4% + 2*9,000*0.4%) + (2*9,000*0.05% + 2*9,000*0.05%)] / (10,000 - 0 - 0 - 2,000) = 2.03%
If the BTC price continues to fall to 8,000 USDT, the long position will incur a loss while the short position will generate a profit. The loss of -2,000 USDT has been hedged, thus realizing the hedging of long and short positions.
Unrealized PnL in the long position = (Market price - average position price) * amount = (8,000 - 10,000) * 2 = -4,000
Unrealized PnL in the short position = (Average position price - market price) * amount = (9,000 - 8,000) * 2 = 2,000
Account available margin = Balance - all position margins - frozen assets + all unrealized PnL of cross margin positions = 10,000 - 3,800 - 0 + (-4,000 + 2,000) = 4,200
Position risk under cross margin mode = (The combined maintenance margin of all cross margin positions + position closing fees of all cross margin positions) / (balance - all margins used in isolated margin positions - frozen assets + all unrealized PnL of cross margin positions) = [(2*8,000*0.4% + 2*8,000*0.4%) + (2*8,000*0.05% + 2*8,000*0.05%)] / [10,000 - 0 - 0 + (-4,000+2,000)] = 1.8%
Note: The reduction in the risk here is due to the price drop of BTC resulting in lower maintenance margins and trading fees for BTC positions.
3.2 Partial Hedge
In partial hedge, users long and short positions of the same contract with different position amounts. Long and short positions will be partially hedged and the hedged amount equals the one with a lesser amount between long and short positions. Users will only gain the profit or bear the loss incurred from the remaining long or short positions after a partial hedge.
Examples (without taking trading fees into account):
The user's initial account balance is 10,000 USDT. In cross margin mode, a long position and a short position are opened for 4 BTC and 2 BTC respectively both with 10x leverage when the BTC/USDT price is 10,000 USDT. The user's position and account conditions at this time are as follows (assuming the maintenance margin rate is 0.4%, and the taker fee rate is 0.05%).
Initial margin of the long position = Average position price * amount / leverage = 10,000 * 4 / 10 = 4,000
Initial margin of the short position = Average position price * amount / leverage = 10,000 * 2 / 10 = 2,000
Account available margin = Balance - all position margins - frozen assets + all unrealized PnL of cross margin positions = 10,000 - (4,000 + 2,000) - 0 + 0 = 4,000
Position risk under cross margin mode = (The combined maintenance margin of all cross margin positions + position closing fees of all cross margin positions) / (balance - all margins used in isolated margin positions - frozen assets + all unrealized PnL of cross margin positions) = [(4*10,000*0.4% + 2*10,000*0.4%) + (4*10,000*0.05% + 2*10,000*0.05%)] / (10,000 - 0 - 0 + 0) = 2.7%
If the net long position is 2 BTC when the BTC price drops to 9,000 USDT, a loss is incurred. The user's position and account conditions at this time are as follows.
Unrealized PnL in the long position = (Market price - average position price) * amount = (9,000 - 10,000) * 4 = -4,000
Unrealized PnL in the short position = (Average position price - market price) * amount = (10,000 - 9,000) * 2 = 2,000
Account available margin = Balance - all position margins - frozen assets + all unrealized PnL of cross margin positions = 10,000 - (4,000 + 2,000) - 0 + (-4,000 + 2,000) = 2,000
Position risk under cross margin mode = (The combined maintenance margin of all cross margin positions + position closing fees of all cross margin positions) / (balance - all margins used in isolated margin positions - frozen assets + all unrealized PnL of cross margin positions) = [(4*9,000*0.4% + 2*9,000*0.4%) + (4*9,000*0.05% + 2*9,000*0.05%)] / [10,000 - 0 - 0 + (-4,000 + 2,000)] = 3.04%