Derivatives are those financial instruments which derive their value from the value of other assets. In other words they have no value on their own rather their value depends on the value of the underlying asset. For example the value of call or put option of Microsoft stock will depend on the price movement of Microsoft stock. There are 3 important participants in the derivatives market which include the following –
1. Hedgers – They are those who buy or sell in derivatives market in order to reduce their risk of their portfolio. For example if the portfolio of hedger is long then he will protect or hedge this position by buying put options in derivatives market.
2. Speculators – Speculators are those who enter into the market purely for making profit by buying or selling the derivatives, they do not have any intention of hedging their portfolio or such thing their only aim is to make profit based on their judgment about the stock or market.
3. Arbitrageurs – Arbitrage refers to obtaining risk free profits by simultaneously buying and selling similar instruments in different markets. Arbitrageurs enter into derivative market in order to take advantage of any such opportunity and profit from it