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NISM Certifications · NISM-Series-VIII: Equity Derivatives · Basics of Derivatives

Which of the following best describes the role of a 'hedger' in the derivatives market?

A hedger is a participant who uses derivatives to reduce an existing price risk in the underlying asset. Arbitrageurs exploit price differences across markets and speculators take open positions on price views, so those descriptions do not fit a hedger.

  1. AA participant who takes positions to reduce an existing price risk in the underlying assetCorrect
  2. BA participant who profits from price differences of the same asset in two markets at the same time
  3. CA participant who takes open positions hoping to gain from expected price movements
  4. DA participant who matches buyers and sellers without taking any position

Explanation

A hedger uses derivatives to offset price risk from an existing exposure. Profiting from price differences across markets describes an arbitrageur, and taking open positions on a view describes a speculator. Matching buyers and sellers without positions is a broker-type function.

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