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What are the Motivations to Trade Futures and Options?

There are three typical motivations for trading futures and options:

Hedging
The purpose of hedging is to protect existing or planned cash market positions (for example portfolios of securities – equities or bonds) by entering into an opposite position in the derivatives market.

Hedge = a counter-position that offsets the cash market position

Trading
The attempt to make a profit from the speculative purchase or sale of futures or options - assuming that the anticipated price development actually takes place. The low capital investment required for trading futures or options results in a leverage effect.

Using leverage to benefit from expectations

Example

POE01020010

 

Arbitrage
Exploiting price differences between different markets.

Summary example (arbitrage between different trading platforms):
Siemens shares are traded concurrently on Xetra, Deutsche Börse's electronic trading system, and within the specialist trading model of the Frankfurt Stock Exchange.

Börse Frankfurt: 77                         Price Xetra: 75

Note:
The example is only illustrative. Differences in price of such magnitude usually do not occur in reality. Minimal differences are possible though. The specialist trading price can be slightly higher or lower as the Xetra price.

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Ideally arbitrage leads to consistent and, with that fair market prices, on which this product is traded at the same time.

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