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Market Participants in derivative market.

 Participants in Derivatives Market


What are  Market Participants in derivative market.

There are broadly three types of participants in the derivatives market ‐ hedgers, traders  (also called speculators) and arbitrageurs. An individual may play different roles in  different market circumstances.


  

Hedgers 

They face risk associated with the prices of underlying assets and use derivatives to  reduce  their  risk.  Corporations,  investing  institutions  and  banks  all  use  derivative  products to hedge or reduce their exposures to market variables such as interest rates,  share values, bond prices, currency exchange rates and commodity prices.
   

Speculators/Traders 

 They try to predict the future movements in prices of underlying assets and based on  the  view,  take  positions  in  derivative  contracts.  Derivatives  are  preferred  over  underlying asset for trading purpose, as they offer leverage, are less expensive and are faster to execute in  size (high volumes market). 

 Arbitrageurs  

Arbitrage is a deal that produces profit by exploiting a price difference in a product in  two different markets. Arbitrage originates when a trader purchases an asset cheaply in  one location and simultaneously arranges to sell it at a higher price in another location.  Such opportunities are unlikely to persist for very long, since arbitrageurs would rush in  to these transactions, thus closing the price gap at different locations.  
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The analogy I have used might not be 100% correct but it’s easy to understand things with a simpler analogy.

That’s it for this post. Do check out my other posts to gain more knowledge about finance.
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