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Subject 4. Commodity Futures Market Participants PDF Download
An efficient market for commodity futures requires a large number of market participants with diverse risk profiles. Ownership of the underlying commodity is not required for trading in commodity futures. Market participants simply need to deposit sufficient money with brokerage firms to cover the margin requirements.

The commodity trading environment is similar to that of other asset classes, with three types of trading participants: hedgers, speculators, and arbitrageurs.

Hedgers

They are generally the commercial producers and consumers of the traded commodities. They participate in the market to manage their spot market price risk.

Hedging is a two-step process. For example, if the hedger is going to sell a cash commodity at a later time, his first step is to sell future contracts. The second step occurs when the cash market transaction takes place. If the hedger is initially long, he would offset his position by selling the contract back.

Speculators

They are traders who speculate on the direction of the futures prices with the intention of making money. Thus, for speculators, trading in commodity futures is an investment option.

Arbitrageurs

They are traders who buy and sell to make money on time- or location-based price differentials across different markets. Arbitrage involves simultaneous sale and purchase of the same commodities in different markets. Arbitrage keeps the prices in different markets in line with each other. Usually such transactions are risk-free.

Other participants include exchanges, which set trading rules and provide trading infrastructures, analysts, who use the exchange information for non-trading purposes (e.g., research), and regulators, who monitor and police the markets.

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