Linda asks…

If neither hedgers nor speculators have private information, should both be expected to make zero profit?

If neither hedgers nor speculators have private information, should both be expected to make zero average profit from futures trading ? Why?

landscapeliving answers:

I don't think so. Hedgers need liquidity and speculators provide it. I think you could make an argument that speculators demand a premium for providing liquidity to the market.

Research by Rich Lyons at Berkeley shows that order flow from hedgers in the FX market predicts changes in FX prices. This is an area of investment where there is very little private information.

William asks…

who are hedgers and speculators in futures market?

I really do not understand either. It was asked in an examination i sat for in April 2009.

landscapeliving answers:

Hedging is where you balance your risk by offsetting one investment with another. Eg a shorting an index while buying a sector. E.g. You bet that the oil sector increases and short the S&P500. If suddenly there is a war then the whole market will be hit. So the index short will offset losses in the oil sector.
Speculating is guessing which way a price will move.

Ken asks…

How do hedgers profit?

I mean hedging is invented to protect investors from interest rate volatility. They hedge a long position with a short one, and a short position with a long one.
When the exposure to risk is eliminated, so is the opportunity to profit.

landscapeliving answers:

That is correct but that is just the purpose. Hedging is a protection. One buys an insurance against for instance interest rate volatility, and that insurance has a price.

By hedging interest rates, a firm is able to alter its interest rate exposures and bring them in line with management's appetite for interest rate risk. For instance the management might prefer cashflows that are constant over time over fluctuating ones.

Mandy asks…

One difference between a hedger and a speculator is that the hedger?

A. may have either a profit or a loss.
B. may not close out his position by taking an opposite position.
C. does not have to put up margin.
D. faces a risk without the futures contract.

landscapeliving answers:

None of the above.

Hedgers always secures his position by covering the future. Therefore doesn't incur loss, if not profit. But speculators are gamblers may gain or loose.

Susan asks…

What does a trust fund hedger do for a living?

I hear they make millions of a single deal.

landscapeliving answers:

They make trust fund deals with hedge trimmers

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