Derivative Market Participants

Hedgers: Enter into derivative contracts to offset similar risks that they hold in an underlying physical market. In so doing, they transfer risk to other market participants, such as speculators or other hedgers. Hedging is the primary social rationale for trading in derivatives.

Speculators: Take unhedged risk positions in order to exploit informational inefficiencies and mispriced instruments or to take advantage of their risk capacity. Speculators are individual traders and companies willing to take on risk in the pursuit of profits.

Arbitrageurs: Take opposite positions in mispriced instruments in order to earn an essentially riskless return. The arbitrage process ensures that prices between related markets stay consistent with one another.

bNGI Daily Gas Price Index (February 4, 2002), p. 9.

cPlatts, Gas Daily (February 4, 2002), p. 2.