FINANCIAL DERIVATIVES/SNSCT/MBA Types of Traders Participants in a derivative market can be segregated into four sets based on their trading motives. Hedgers Speculators Margin Traders Arbitrageeurs FINANCIAL DERIVATIVES/SNSCT/MBA

FINANCIAL DERIVATIVES/SNSCT/MBA Hedger A hedge is an investment position intended to offset potential losses or gains that may be incurred by a companion investment. In simple language, a hedge is used to reduce any substantial losses or gains suffered by an individual or an organization. A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, gambles,[1] many types of over-the-counter and derivative products, and futures contracts. FINANCIAL DERIVATIVES/SNSCT/MBA

FINANCIAL DERIVATIVES/SNSCT/MBA Speculator Speculation is the purchase of an asset (a commodity, goods, or real estate) with the hope that it will become more valuable at a future date. In finance, speculation is also the practice of engaging in risky financial transactions in an attempt to profit from short term fluctuations in the market value of a tradable financial instrument—rather than attempting to profit from the underlying financial attributes embodied in the instrument such as capital gains, dividends, or interest. Many speculators pay little attention to the fundamental value of a security and instead focus purely on price movements. Speculation can in principle involve any tradable good or financial instrument. Speculators are particularly common in the markets for stocks, bonds, commodity futures, currencies, fine art, collectibles, real estate, and derivatives. Speculators play one of four primary roles in financial markets, along with hedgers, who engage in transactions to offset some other pre-existing risk, arbitrageurs who seek to profit from situations where fungible instruments trade at different prices in different market segments, and investors who seek profit through long-term ownership of an instrument's underlying attributes. FINANCIAL DERIVATIVES/SNSCT/MBA

FINANCIAL DERIVATIVES/SNSCT/MBA Margin Traders In finance, margin is collateral that the holder of a financial instrument has to deposit with a counterparty (most often their broker or an exchange) to cover some or all of the credit risk the holder poses for the counterparty. This risk can arise if the holder has done any of the following: Borrowed cash from the counterparty to buy financial instruments, Borrowed financial instruments to sell them short, or Entered into a derivative contract. The collateral for a margin account can be the cash deposited in the account or securities provided, and represents the funds available to the account holder for further share trading. On United States futures exchanges, margins were formerly called performance bonds. Most of the exchanges today use SPAN ("Standard Portfolio Analysis of Risk") methodology, which was developed by the Chicago Mercantile Exchange in 1988, for calculating margins for options and futures. FINANCIAL DERIVATIVES/SNSCT/MBA

Institutional investor An institutional investor is an investor, such as a bank, insurance company, retirement fund, hedge fund, or mutual fund, that is financially sophisticated and makes large investments, often held in very large portfolios of investments. Because of their sophistication, institutional investors may often participate in private placements of securities, in which certain aspects of the securities laws may be inapplicable FINANCIAL DERIVATIVES/SNSCT/MBA

FINANCIAL DERIVATIVES/SNSCT/MBA Retail investor A retail investor is an individual investor possessing shares of a given security. Retail investors can be further divided into two categories of share ownership. A Beneficial Shareholder is a retail investor who holds shares of their securities in the account of a bank or broker, also known as “in Street Name.” The broker is in possession of the securities on behalf of the underlying shareholder. A Registered Shareholder is a retail investor who holds shares of their securities directly through the issuer or its transfer agent. Many registered shareholders have physical copies of their stock certificates. FINANCIAL DERIVATIVES/SNSCT/MBA

FINANCIAL DERIVATIVES/SNSCT/MBA Arbitrageurs They are traders who buy and sell to make money on 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. FINANCIAL DERIVATIVES/SNSCT/MBA

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FINANCIAL DERIVATIVES/SNSCT/MBA Types of Traders HEDGERS They use futures, forwards and options to reduce the risk that they face from potential future movements in a market variable. SPECULATORS They use derivative products to bet on the future direction of a market variable. ARBITRAGEURS They take offsetting positions in two or more instruments to lock in a profit. FINANCIAL DERIVATIVES/SNSCT/MBA

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