Market Participants Flashcards
Who is the contract principal on a deal?
a trader
Why is a trader a contract principal>
At one point he will own the commodity, so he runs risks
Why would a trader run a price risk?
If he is not properly hedged
Why would a trader run a basis risk?
if he is hedged and the price of commodity he owns moves adversely relative to his hedge
What is a company who trades in physical commodities called?
trade house/ trading house
Which market participant doesn’t take a price risk>
A broker
What does a broker do?
puts together buyer and seller for comission
What is the risk for the broker>
losing comission if one or both parties in contract fail to perform - his loss is limited to comisssion, but so is profit
What is the role of a broker in the market?
Brokers lube up the market. looking for teh commodity in the place, time and form that benefits both parties in a transaction
What relationship do traders and brokers have?
Traders don’t have enough time to call all possible sellers when they want to buy, or all possible byuers when they want to sell. Brokers do that and help negotiate.
Why are brokers useful?
They are constantly in touch with everyone and can pick up relevant news, views and trends that they can communicate to traders.
Who do brokers work for?
No one. they should not favour either. Sellers traditionally pay the broker but that means nothing in terms of favouring
What is a futures broker?
someone who executes an order on a futures exchange on behalf of a client.
Who are agents?
They work for a company, perhaps in another ocuntry sourcing them produce etc
Which market participant is neither a physical trader or merchindiser?
Commodity speculator
What is a “Noncommercial”
an entity - person, company , hedge fund, pension fund that is not involved in the physical transformation of the underlying commodity
How is a non commercial involved in the supply chain?
they assume some of the price risk that commercials (physical traders) don’t want
Why do we need them in the supply chain>
without them the physical traders would have to either assume more price risk, only buy at the same time as they sell or sell a the sae time as they buy.
Why would hedge funds and banks get involved in the market?
They believe they can beat the market and predict future price movements.
What role do none commercials play beyond risk assumption?
by buying before a supply deficit hits, or selling before a surplus hits, speculative activity makes the price moving before the deficit or surplus can happen, helping to prevent crisises.
By anticipating problems…
speculative activity can help markets solve them before they occur.
What’s a positive of prices getting overexaggerated?
It encourages more production
Why is it better for trading houses to be private?
The volatility in earnings isn’t attactive to shareholders
