SRI RAMAKRISHNA ENGINEERING COLLEGE

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Grade] [Approved by AICTE and Permanently Affiliated to
Anna University, Chennai] [ISO 9001:2015 Certified and all
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DEPARTMENT OF MANAGEMENT STUDIES

Case study – 3
on
Hedgers, Speculators, and Arbitrageurs in Action

SUBMITTED BY
BHARATH R
71812291004
The strategies typically followed by each of the participants:
ABC Corporation, a leading manufacturer of electronic goods in India, has been
facing increasing price volatility in raw materials such as copper, silicon, and
aluminum due to global supply chain disruptions and fluctuating demand.
1. Hedgers: ABC Corporation decides to hedge its exposure to fluctuating raw
material prices by entering into derivative contracts. As a hedger, the company
aims to lock in favorable prices for its raw materials and protect its profit margins
against adverse price movements.
2. Speculators: Mr. Patel, a seasoned trader, identifies an opportunity to profit
from the volatility in raw material prices. He believes that the recent supply chain
disruptions will lead to a surge in demand for electronic goods, driving up raw
material prices further. Mr. Patel decides to speculate on the price of copper by
purchasing futures contracts with the expectation of selling them at a higher price
in the future.
3. Arbitrageurs: Ms. Khan, a quantitative analyst working for a large investment
firm, notices a price discrepancy between the futures price of copper on the NSE
and the spot price in the physical market. She identifies an arbitrage opportunity
and quickly buys copper futures contracts on the NSE while simultaneously
selling an equivalent amount of copper in the physical market, aiming to profit
from the price difference.
The task is to describe the strategy that can be followed by Hedgers, Speculators,
and Arbitrageurs in this scenario.

1. Hedgers:
ABC Corporation, facing volatile prices for raw materials like copper, silicon,
and aluminum, uses derivatives to hedge against price fluctuations. By entering
into derivative contracts, the company locks in prices for these materials,
protecting its profit margins from adverse movements in raw material costs.
 Strategy: Hedging involves taking a position in the derivatives
market that is opposite to the risk exposure in the underlying asset.
In this case, ABC Corporation, as a hedger, would likely enter into
derivative contracts, such as futures or options, to mitigate the risk
posed by fluctuating raw material prices.
 Objective: The primary goal of hedging is to protect against adverse
price movements in the underlying asset. By locking in favorable
 prices through derivative contracts, ABC Corporation aims to
stabilize its costs and protect its profit margins.
2. Speculators:
Mr. Patel, a trader, speculates on the prices of raw materials, particularly copper.
Anticipating that supply chain disruptions will boost demand for electronic goods
(and thus raw materials), he buys futures contracts expecting to sell them at a
higher price later.
 Strategy: Speculators, like Mr. Patel, aim to profit from price
movements in the underlying asset by taking directional bets in the
derivatives market. Speculators often rely on market analysis,
trends, and other factors to forecast price movements.
 Objective: Unlike hedgers who seek to reduce risk, speculators
actively embrace risk to generate profits. Mr. Patel's strategy
involves buying futures contracts with the anticipation that the price
of copper will increase, allowing him to sell the contracts at a higher
price in the future and pocket the difference.
3. Arbitrageurs:
Ms. Khan, a quantitative analyst, exploits price discrepancies between the futures
and spot prices of copper. She observes a lower futures price on the NSE
compared to the spot price in the physical market, leading her to buy futures while
selling the equivalent amount in the spot market to capture the price difference as
profit.
 Strategy: Arbitrageurs exploit price discrepancies between related
assets or markets to lock in risk-free profits. They simultaneously
buy and sell assets or derivatives to capitalize on these pricing
inefficiencies.
 Objective: The goal of arbitrageurs, such as Ms. Khan, is to profit
from the price difference between the futures market and the
physical market. By buying copper futures contracts on the NSE
while selling an equivalent amount of copper in the physical market,
she aims to capture the price differential and earn a profit without
assuming any directional market risk.
Each participant in the market—hedgers, speculators, and arbitrageurs—plays a
distinct role and employs specific strategies tailored to their objectives and risk
tolerance. Together, they contribute to the efficiency and liquidity of the market
while pursuing their individual goals.