Question

Companies that attempt to exploit inefficiencies in various derivative markets by attempting to lock in profits by simultaneously entering into transactions in two or more markets are called?

1) arbitrageurs
2) gamblers
3) hedgers
4) speculators

Answer 1

Companies that try to profit from price discrepancies between markets by simultaneously buying and selling are called arbitrageurs. They differ from hedgers, who enter into contracts to protect against financial risk, such as fluctuating currency exchange rates.

Step-by-step explanation:

Companies that engage in transactions across multiple markets to exploit inefficiencies and lock in profits are known as arbitrageurs. They aim to profit from price discrepancies between different markets by simultaneously buying and selling derivatives or other financial instruments. For example, let's consider a scenario where a firm is operating in the financial market and dealing with currency exchange risks. They have a contract involving foreign currency that could fluctuate in value, and instead of speculating on which way the exchange rate will go, they decide to hedge. Hedging involves entering into a financial contract, like a futures contract, offering protection against potential financial loss due to currency rate change. This safeguards the firm's interests and provides certainty regarding the value of the contract. Financial institutions or brokerage companies often manage these hedging contracts and might earn through fees or by creating a spread in the exchange rate.