How Hedgers and Speculators work together to exchange risks in terms of purchasing and selling. Explain how both participants interact in reversing trade and the purpose of having daily price limits as a feature of currency futures.

Multinational corporations, currency futures 02

By locking in future prices, hedgers can exchange risk by working with speculators. The futures market is used by both hedgers and speculators as a means to minimize their losses from fluctuations in commodity prices. In order to preserve their profit margins in case the price of their underlying commodities moves against them, the hedger either buys or trades futures at predetermined prices.

However, the speculator takes advantage of price fluctuations by purchasing low and then selling high. They essentially become “middlemen” between buyers and sellers, taking on higher levels of risk but also potentially earning greater rewards when done correctly. Hedgers and speculators both can benefit by exchanging commodities buying and selling risks.

One example is known as “reversing trade” which occurs when a hedger buys one contract then immediately sells another at different prices thereby offsetting any potential losses due to fluctuating markets conditions. Daily price limits, which are important features currency futures, provide safeguards for market participants and keep trades transparent. They also reduce speculation risks.

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