Participants.pptx
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The major participants in derivative markets are hedgers, speculators, and arbitrageurs. Hedgers use derivatives to reduce risk associated with price movements of an asset. Speculators buy and sell derivatives to make profits by betting on future price movements, rather than reducing risk. Arbitrageurs take advantage of price discrepancies in different markets by simultaneously buying and selling assets to generate riskless profits. Together these different types of traders provide liquidity and help stabilize prices in the derivatives market.
Participants.pptx
- 1. Participants of Derivative Markets Ramya B Assistant Professor B.com(PA) Sri Ramakrishna College of Arts and Science Coimbatore - 641 006 Tamil Nadu, India
- 2. Major players or participants of Derivative markets • The derivatives market is growing considerably all over the world. The main reasonis that they have attracted many types of traders having a great deal of liquidity. • When an investor wants to take one side of contract, there is usually no problem in finding someone that is prepared to take the other side. The different traders active in the derivatives market can be categorized into three parts: Hedgers Speculators Arbitrageurs
- 3. Hedgers • Hedging is an activity to reduce risk and hedger is someone who faces risk associated with price movement of an asset and who uses derivatives as a means of reducing that risk. • A hedger is a trader who enters the futures market to reduce a pre- existing risk. • For example, an importer imports some goods from USA for $ 100 and the payment is to be made after three months. Suppose, today the dollar-price quote is 1 $= Rs. 45. • Therefore, if the payment is to be made today, the cost of goods in Indian currency will be Rs. 4500. But due to uncertainty in future movement in prices, there may be chance of dollar appreciation thereby increasing the cost of goods for the importer.
- 4. Speculators • While hedgers are interested in reducing or eliminating the risk, Speculators buy and sell the derivatives to make profit and not to reduce the risk. • They buy when they believe futures or options to be under priced and sell when they view them as over- priced. John Stuart Hill (1871) elaborated by observing that speculators play an important role in stabilizing prices. • Because they buy when prices are low and sell when prices are high, in turn improve the temporal allocation of resources and have a dampening effect on seasonal price fluctuations. • Speculators willingly take increased risks. Speculators wish to take a position in the market by betting on the future pricemovements of an asset.
- 5. Arbitrageurs • An arbitrageur is a person who simultaneously enters into a transaction in two or more markets to take advantage of price discrepancy in those markets. It is totally a riskless activity. • For example, if the futures prices of an asset are very high relative to the cash price, an arbitrageur will make profit by buying the asset in spot market and simultaneously selling the futures. Hence, arbitrage involves making profits from relatively mispricing and thereby enhancing the price stability in the market. • All three types of traders and investors are required for a healthy functioning of the derivatives market.
- 6. Difference between Hedging and Speculation S.No Basis Hedging Speculation 1 Meaning The act of preventing an investment against unforeseen price changes is known as hedging. Speculation is a process in which the investor involves in a trading of financial asset of significant risk, in the hope of getting profits. 2 What is it? A means to control price risk. It relies on the risk factor, in expectation of getting returns. 3 Involves Protection against price changes Incurring risk to make profits from price changes. 4 Operators are Risk averse Risk lovers