Types of participants in the derivatives market

21 sie 2022

Hey everyone!

Last week we talked about the basics of derivatives and what all different derivative instruments are available in the markets. In this post, we will talk about the types of people who use derivatives and why they exist.

There are broadly three types of participants in the derivatives market:
→ Hedgers
→ Traders (also called speculators)
→ Arbitrageurs.

An individual may play different roles at different times.

Hedgers
→ They employ derivatives to mitigate the risk they suffer from fluctuations in the pricing of the underlying assets.
→ Institutions such as investment banks, central banks, hedge funds, etc. all use derivatives to hedge or reduce their exposures to market variables such as currency exchange rates, interest rates, equity values, bond prices, and commodity prices.

Speculators/Traders
→ The speculators are primary participants in the futures market.
→ They try to predict the future movements in prices of underlying assets and position themselves accordingly.
→ Speculators can be individual traders, proprietary trading firms, hedge funds, or market makers.

Arbitrageurs
→ Arbitrage is a deal that produces profit by exploiting a price difference in a product in two different markets.
→ Arbitrage occurs when a trader executes a simultaneous purchase and sale of the same asset in different markets in order to gain from tiny price differences between them.
→ The arbitrage trade is often short lives because the arbitrageurs would rush in executing these transactions, thereby closing the price gap at different locations.

Thanks for reading! Hope this was helpful.
See you all next week. 🙂
– Team TradingView

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