Behavior of Hedgers and Speculator

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Behavior of Hedgers and Speculator

The existence of a futures market that includes futures trading is necessary. The main function of the futures market is to provide a market or a central exchange for those with an interest in buying or selling physical commodities at some time in the future. Futures or futures markets help hedgers (hedging actors) reduce risk associated with price movements in the physical market. Price fluctuations in the physical market could result in losses and market participants can hedge by buying or selling futures contracts in futures trading. Examples of commodities that become hedge objects include mining commodities, plantations, farms and jewelry.

The behavior of hedgers usually takes a position on the futures market opposite to their position in the physical market. If there is a loss in the physical market then they will benefit in the futures market. So the risk of loss can be minimized or eliminated or even profitable.

For example, a gold businessman who wants to buy gold in the next few months, worries that he will pay a higher price if the price of gold in the next few months goes up. Then he bought a gold futures contract for hedge (lock) prices. If the price of gold in the physical market goes up, the gold entrepreneur must pay a higher price. However, as he takes a long position in the futures market (buy futures contracts), he already earns a profit on futures contracts, which will offset rising costs of purchasing gold in the physical market. But if it turns out that the price of gold in the physical market and the price in the futures contract, both are down, Hedger will lose its position in the futures market (losers), but pay less when buying gold in the physical market.

Unlike hedgers, speculators have no interest in shipping products or physical commodities. Rather seek profit by assuming risk of price movement. Speculators here include individual investors, hedge funds or commodity trading advisors. All speculators need to be aware that if the market moves in opposite direction to their position, then they speculators can suffer losses.

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