The participants in the derivatives market can be broadly classified into two categories: hedgers and speculators.
- Hedgers: Hedgers are participants in the derivatives market who use derivatives to protect themselves against potential losses in the underlying assets. They use derivatives as a risk management tool. For instance, if a company knows that it will have to pay a certain amount of foreign currency in the future, it can enter into a forward contract or an options contract to hedge against currency risk.
- Speculators: Speculators are participants in the derivatives market who take positions in derivatives to profit from price movements. They are not interested in the underlying asset and may not have any exposure to it. They take risks with the aim of making profits.
Apart from hedgers and speculators, the other participants in the derivatives market include:
- Banks and Financial Institutions: Banks and financial institutions are significant players in the derivatives market. They act as intermediaries, providing liquidity and trading services to clients.
- Corporates: Corporates use derivatives to manage their risks related to currency, commodity, and interest rate fluctuations.
- Government Agencies: Government agencies may use derivatives to hedge against changes in interest rates and currency fluctuations.
- Hedge Funds: Hedge funds are significant speculators in the derivatives market. They use derivatives to take leveraged positions in various assets, such as stocks, commodities, and currencies.
- Retail Investors: With the growth of the retail trading industry, more and more retail investors are also participating in the derivatives market. They use derivatives as a tool for speculation or hedging.
The participation of these players in the derivatives market contributes to its overall liquidity, which is crucial for the efficient functioning of the market.