1. Hedgers

Are participants in commodity derivatives trading to hedge the risk caused by price fluctuations to their detriment

Understanding Price Hedgers

Hedging  is similar to owning an insurance policy. Just like when you have a home located in a flood prone area, you will need to protect that property from the risk of flooding, or so to speak, protect  it from that, by purchasing flood insurance.

In the example above, you can’t prevent a flood, but you can prepare in advance to reduce your risk when a flood does occur. The hedging is also a risk-reward trade-off. It will help you limit your potential risk, but will also take away some of your potential profits.

Price defense is not free either. As in the flood insurance example above, you still have to pay the premium each month, and if the flood doesn’t happen, you won’t be paid. But nevertheless, most people choose this expected and visible loss over being hit with an unexpected loss.

Investors and money managers use “hedging” measures to limit and control direct risk. In the financial sector, if you want to effectively hedge prices, an investor must use many different tools depending on the investment method to offset the risk from price fluctuations. opposite in the market. The best way to do this is to own another investment but with a specific purpose and control. The correlation of hedging  in investment compared to buying flood insurance above is not much. Because in flood insurance, the policyholder will be fully compensated for his or her damage. But in investing, price hedging is a complex and imperfect science.

Example On Price Hedging in Commodity Trading:  You are opening a long position on 1 March corn futures contract at 500 cents, when the price drops to 450 cents the price still has no sign of increasing, to Avoid losing too much before the price rises. You can switch to corn for May term, open a short position, wait for the price to show signs of increasing again, you will liquidate the contract.

2. Speculators

Are people who take high risks in search of high profits from price fluctuations. They can hold a long position or both positions for the same commodity (spread position). There are two types: Position traders and day traders.

These are also known as risk-takers and are willing to trade when a future price change is expected.

Understanding speculators:

• Speculators often use short-term strategies in an attempt to outperform traditional investors. They are risk takers in the hope of making a profit large enough to offset that risk.

• Speculators taking on excessive risk usually do not last long. They control long-term risks using various strategies such as calculating position sizes, using stop-loss orders, and monitoring trading performance statistics.
• Speculators are usually individuals who accept a high level of risk and have expertise in the market they are trading.
• Speculators attempt to accurately predict price changes in assets, thereby capturing potential profits. They can use leverage to magnify profits (or losses), although this is an individual choice.

There are different types of speculators in the market.

• For example, individual traders can be speculators, if they buy a financial instrument in the short term with the intention of profiting from the change in the price of that instrument.
• Market makers can also be considered speculators because they take the opposite position of market participants and profit from the difference between the bid and ask prices.

Note:

• Usually, speculators operate on a shorter time frame than a traditional investor.
• On the other hand, a speculator can use all the money in a trading account to buy a number of futures contracts, in the hope that they will increase in price in the next few days, weeks, or months. Speculators often use trading strategies that tell them when to buy, when to sell and calculate position size to take.

Example of Speculators in commodity trading:  You buy 1 contract of corn (March contract) for 100 million, not yet expired, the price increases by 110 million, sell immediately. 10 million difference.

3. Arbitrageurs

These are market participants with the goal of achieving profit without incurring any risk by simultaneously trading on many different markets.

As an investor looking to profit from market inefficiencies. This inefficiency can be anything from price, dividends or regulatory factors. The most common arbitrage is based on the price of the asset.

Understanding home arbitrage investing

The arbitrageur  takes advantage of price inefficiencies by executing simultaneous clearing trades for a risk-free return.

For example, an arbitrageur will look for differences in the prices of the same security listed on different exchanges. They buy undervalued securities on one exchange and sell overvalued securities on another in order to earn a risk-free profit when the prices of the two exchanges are close to each other.

Sometimes, they even look for arbitrage opportunities from inside information. For example, an arbitrageur will buy shares of a company when it learns that the company is about to merge and profit from the actual price of the merger later.

Some popular arbitrage investors in the market

These  arbitragers  are usually experienced traders because arbitrage opportunities are often difficult to find and require very fast trading. They are also people with good attention to detail and are used to taking risks. Because arbitrage is often risky. They often have to bet on the direction of the market.

Arbitragers play an important role in capital markets. Because they strive to find price inefficiencies, they also contribute to making prices more accurate.

Today, the rise of virtual currencies also brings new arbitrage opportunities. As the price of Bitcoin hit a record, many arbitrage opportunities also came from price differences between exchanges. For example, Bitcoin prices on Korean exchanges are often higher than those in the US. This price difference is known as Kimchi Premium and occurs mainly because of the high demand for cryptocurrencies in this area.

Example of an Arbitrator in Commodities:  A arbitrageur will find the price difference of the same commodity Copper listed on COMEX and LME. They buy undervalued goods on one exchange and sell overvalued goods on another to earn a risk-free profit when the prices of the two exchanges are close to each other.

Article with References from: Investopedia