Types of traders in a derivatives market
Hedgers, speculators and arbitrators are the types of traders in derivatives market.Hedgers : Hedgers are those who protect themselves from the risk associated with the price of an asset by using derivatives. A person keeps a close watch upon the prices discovered in trading and when the comfortable price is reflected according to his wants, he sells futures contracts. In this way he gets an assured fixed price of his produce. In general, hedgers use futures for protection against adverse future price movements in the underlying cash commodity. Hedgers are often businesses, or individuals, who at one point or another deal in the underlying cash commodity. Take an example: A Hedger pay more to the farmer or dealer of a produce if its prices go up. For protection against higher prices of the produce, he hedge the risk exposure by buying enough future contracts of the produce to cover the amount of produce he expects to buy. Since cash and futures prices do tend to move in tandem, the futures position will profit if the price of the produce rise enough to offset cash loss on the produce. Speculators : Speculators are some what like a middle man. They are never interested in actual owing the commodity. They will just buy from one end and sell it to the other in anticipation of future price movements. They actually bet on the future movement in the price of an asset. They are the second major group of futures players. These participants include independent floor traders and investors. They handle trades for their personal clients or brokerage firms. Buying a futures contract in anticipation of price increases is known as ‘going long’. Selling a futures contract in anticipation of a price decrease is known as ‘going short’. Speculative participation in futures trading has increased with the availability of alternative methods of participation. Speculators have certain advantages over other investments they are as follows:
If the trader’s judgement is good, he can make more money in the futures market faster because prices tend, on average, to change more quickly than real estate or stock prices.
Futures are highly leveraged investments. The trader puts up a small fraction of the value of the underlying contract as margin, yet he can ride on the full value of the contract as it moves up and down. The money he puts up is not a down payment on the underlying contract, but a performance bond. The actual value of the contract is only exchanged on those rare occasions when delivery takes place. Arbitrators :According to dictionary definition, a person who has been officially chosen to make a decision between two people or groups who do not agree is known as Arbitrator. In commodity market Arbitrators are the person who take the advantage of a discepancy between prices in two different markets. If he finds future prices of a commodity edging out with the cash price, he will take offsetting positions in both the markets to lock in a profit. Moveover the commodity futures investor is not charged interest on the difference between margin and the full contract value.