11:03 AM ull GD O06 CFI. = Participants in the Derivatives Market The participants in the derivatives market can be broadly categorized into the following four groups: 1. Hedgers Hedging is when a person invests in financial markets to reduce the risk of price volatility in exchange markets, i.e., eliminate the risk of future price movements. Derivatives are the most popular instruments in the sphere of hedging. It is because derivatives are effective in offsetting risk with their respective underlying assets. 2. Speculators Speculation is the most common market activity that participants of a financial market take part in. It is a risky activity that investors engage in. It involves the purchase of any financial instrument or an asset that an investor speculates to become significantly valuat the future. Speculation is driven by the m a © 4 Scanned with CamScanner11:03 AM Baul 068 CFI. 2. Speculators Speculation is the most common market activity that participants of a financial market take part in. It is a risky activity that investors engage in. It involves the purchase of any financial instrument or an asset that an investor speculates to become significantly valuable in the future. Speculation is driven by the motive of potentially earning lucrative profits in the future. 3. Arbitrageurs Arbitrage is a very common profit-making activity in financial markets that comes into effect by taking advantage of or profiting from the price volatility of the market. Arbitrageurs make a profit from the price difference arising in an investment of a financial instrument such as bonds, stocks, derivatives, etc. 4. Margin traders In the finance industry, margin is the colla’ a @ <4 Scanned with CamScanner11:03 AM Buu! Bul GD CFI. = 2. Futures Futures contracts are standardized contracts that allow the holder of the contract to buy or sell the respective underlying asset at an agreed price on a specific date. The parties involved in a futures contract not only possess the right but also are under the obligation, to carry out the contract as agreed. The contracts are standardized, meaning they are traded on the exchange market. 3. Forwards Forwards contracts are similar to futures contracts in the sense that the holder of the contract possesses not only the right but is also under the obligation to carry out the contract as agreed. However, forwards contracts are over- the-counter products, which means they are not regulated and are not bound by specific trading rules and regulations. Since such contracts are unstandardize are traded over the counter and not on a © 4 Scanned with CamScanner11:03 AM Buu! Bul GD OQ @ orporatefinanceinstitute.com 066 CFI. traging rules ana reguiauons. Since such contracts are unstandardized, they are traded over the counter and not on the exchange market. As the contracts are not bound by a regulatory body's rules and regulations, they are customizable to suit the requirements of both parties involved. 4. Swaps Swaps are derivative contracts that involve two holders, or parties to the contract, to exchange financial obligations. Interest rate swaps are the most common swaps contracts entered into by investors. Swaps are not traded on the exchange market. They are traded over the counter, because of the need for swaps contracts to be customizable to suit the needs and requirements of both parties involved. ‘isms of the Derivatives Mar! a © 4 Scanned with CamScanner