Role Played By Speculators and Hedgers in the Derivatives Market Assignment

Role Played By Speculators and Hedgers in the Derivatives Market - Assignment Example According to the research findings, the big disadvantages of speculation are that it increases volatility in the market and excessive speculation creates bubbles and artificial price rises. The regulatory activity is designed to check excessive speculation. Arbitrageurs are a third important group of participants in the derivatives market. Arbitrage involves locking in a riskless profit by simultaneously entering into transactions in two or more markets. As a sophisticated speculator, the researcher will take positions. He strongly believes that the FTSE 100 index will rise to 2800 in December. The futures contract with the exercise price of 2700 is currently available. The author has GBP 10 million available. He will take a long position in this futures contract with the exercise price of 2700. One futures contract is for 100 times the size of the index. If the mark-to-market settlement is ignored, the author can also invest GBP 10 million at a risk-free interest rate. The negative pay-off means that the speculative strategy will lead to a loss of GBP 2,294,000. The fund manager will not exercise the put options because the exercise of put options will lead to a negative payoff.The value of the original portfolio will remain unchanged because the FTSE 100 index is at its original level of 2600 and Beta of the portfolio is 1.