Hedgers and Speculators

Question

Explain hedgers and speculators are two types of economic agents required for a derivatives market to function.

Answer 1

Speculators and Hedgers are two types of market participants which are necessary for the operation of derivatives market.  Speculator attempts to profit from change in the futures price.  For doing this, speculator will take a short or long position in futures contract which depends on his expectations of future price movement.  Whereas, a hedger wishes to provide the price variation by locking in the purchase price of underlying asset through a long position in the futures contract or the sales price through a short position.  In effect, hedger passes off the risk of price variation to the speculator who is able, or at least more eager, to bear this risk.