Common Terms in Commodities Trading
Hedgers
Hedgers are those who hold simultaneous positions in the spot market also. These are generally the actual consumer of the commodities. For e.g. a wheat farmer who expects his harvest to be over in 3 months time sell a future contract with an expiry of three months so that even if the price happen to fall after three months, he can still manage to sell the price at which the contract was struck.
The large scale of consumers of the product can also make use of the futures to secure their purchase. For e.g. a cold drinks can manufacturing company many buy tin futures , so that even if the price happen to rise later, they can assumed of the supply of raw materials at the pre-determined price.
The other major groups of participants in the commodity future market are the importers and the exporters. Since they have confirmed obligations to export or import fixed quantity of commodities at a particular period of time, they can take opposite positions in the future market.
Arbitragers
Arbitrage is a process of making profits using the price difference between two markets without exposing oneself to any task. Arbitraging is a very profitable business. It is possible to arbitrage between two different future markets or between the futures market and the spot market. However in an efficient market arbitraging is not possible because any price gap is closed immediately as soon the arbitragers enter the market.
Investors
Investors are those who participate in the market for profits and are ready to face the risk involved in the market. An investor can be anyone from an individual who has a small surplus income to the treasury desks of banks and corporate.
