Timeline for How do speculators make profit?
Current License: CC BY-SA 4.0
12 events
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| Nov 17, 2019 at 13:09 | comment | added | JTP - Apologise to Monica♦ | Right. Just as a speculator can be on both sides of the future contract. On reflection, I may re-write the answer to reflect hedger/speculator, long/short, to show all 4 possible positions w/o regard to counter party. | |
| Nov 17, 2019 at 8:33 | comment | added | juhist | The counterparty to the transaction is not necessarily a speculator. It may be a buyer of gold worried that gold price might increase. | |
| Nov 15, 2019 at 15:42 | comment | added | JTP - Apologise to Monica♦ | Bob helped clarify my remarks. In my answer, I have risk. I am mining gold, and will be long 100oz in a year. By hedging, I become risk neutral. The gain in value of the gold I will mine is lost as I've sold the contract. I also have no risk if the price drops below my mining expenses. | |
| Nov 15, 2019 at 15:42 | comment | added | GGGG | If the speculator and the hedger gain or loose identically, then a hedger in long position would be happy to buy an asset at a higher price. Why would anybody do that other than traders. This makes no sense to me. | |
| Nov 15, 2019 at 15:37 | comment | added | GGGG | So you are saying that this is wrong? Which implies that in the long position both the hedger and the speculator gain when a price increase? | |
| Nov 15, 2019 at 15:36 | comment | added | GGGG | i tagged a link under my question to show you the slides where i got this information that is confusing me from. Please check it. | |
| Nov 15, 2019 at 15:18 | comment | added | Bob Baerker | The speculator and the hedger gain or lose identically on the futures contract when price rises or price drops. The difference is that the hedger owns the underlying so he has an offsetting position. IOW, if he owns lumber (trees to be harvested later this year) and sells the contract, he locks in a sell price and market price change doesn't affect him. He may have done better had he sold the contract at a higher price price (opportunity loss) but that's hindsight. The hedger's concern is locking an an acceptable price when that price is available. | |
| Nov 15, 2019 at 14:48 | comment | added | JTP - Apologise to Monica♦ | The hedger, in my examples, does so to neutralize risk. In my answer, I pass the risk to the speculator. If the price falls, he loses money, if it rises, he gains. I suppose if the price increases a lot, I can feel I missed an opportunity, but my own wealth remains unchanged regardless of price movement. | |
| Nov 15, 2019 at 14:09 | comment | added | GGGG | But if we refer to to a person who is hedging , then it would be the opposite of what i wrote above your answer, correct? meaning that a hedger in a long position would gain when prices go down (from what i wrote in my question, if the investor(hedger) gains when price decrease and looses when price increase a long futures position will hedge the risk). is this right? So short and long postions are opposites in terms of hedgers and speculators? | |
| Nov 15, 2019 at 14:05 | comment | added | JTP - Apologise to Monica♦ | Yes, long vs short is similar to stocks. It’s effectively a bet whether prices go up or down. The person who is hedging can also be long or short. In my example I sell a contract because I have physical gold in a years time that I wish to sell. There may be a business that requires a purchase of gold, in which case they will go longer a future contract to guarantee a price at some future time.. | |
| Nov 15, 2019 at 13:34 | comment | added | GGGG | Thanks ! greatly appreciate it. However, is it still fair to say that (in terms of speculation)if the investor takes a short position by selling the asset, then he gains if the price decrease and looses when the price increase?I think it would make sense, since if he speculates that the prices will go down then he better sell the contract imediataley in order to benefit from it. Or, on the other way around, if he takes a long position then he benefits when the price increase since buying the contract now with the idea that prices increase will (inhismind)lead to profit. Is this thinking right? | |
| Nov 15, 2019 at 13:21 | history | answered | JTP - Apologise to Monica♦ | CC BY-SA 4.0 |