Hedging is a primary function of the futures market. Hedging is the buying and selling of futures contracts to offset a particular risk.

1.Hedgers typically own a cash commodity (known as having a long position)
2.A perfect hedge eliminates all risk; perfect hedges are very rare
3.Hedgers can be anyone: farmers, pension fund managers, global companies, manufacturers
 

Speculators trade in the futures market to profit from price fluctuations, and in doing so provide several vital economic functions by facilitating the trading of basic commodities and financial instruments:

1.Assuming risk in the hope of making a profit, not creating risk
2.Participating in the market provide liquidity and capital
3.Providing a mechanism for price discovery
 

Hedge funds are a special class of speculator due to their high leverage, sophisticated computerized trading strategies and tremendous trading volume. Some things to know about hedge funds is that they:

1.Are private investment funds open to limited qualified individuals
2.Comprise between 30 - 50 percent of all trading activities in all financial markets
3.Do not act as “hedges”, rather use leverage to increase returns
4.Are not currently regulated
 

The forward market provides a way for parties to pay “upfront” a fixed price for a product to be delivered at an agreed upon date in the future. This market is still common today, such as when you buy a house that is being built; but there are some limitations to this market such as:

1.Forward contracts lock in prices with a future delivery
2.Forward contracts can be specific and customized agreements
3.Forward contracts contain an element of default in the future
 

The Spot market, also called the over-the-counter (OTC) market, is an alternative to exchanges. There are some key differences between OTC and exchange traded derivatives:

1.OTC trades are typically larger and privately negotiated with specialized terms
2.OTC market is many times the size of exchange-traded derivatives
3.Exchanges offer better liquidity and transparency
4.Exchanges reduce risk of counter-party failure to pay