Speculation and Arbitrage in Futures Markets
Speculation
Taking a directional position on price. Futures are the natural vehicle: leverage is built in, shorting is as easy as going long, and liquidity in the major contracts is excellent.
The leverage cuts both ways, as covered in margin and leverage, and position sizing should follow from the notional exposure rather than from what margin permits.
Speculators are sometimes described as parasitic on genuine hedgers. The economic case is the opposite: a hedger needs someone to take the other side, and without speculators the farmer has no counterparty. Speculation is what makes hedging possible, and the compensation for providing it is bearing the risk the hedger shed.
Arbitrage
Exploiting price relationships that must hold.
Cash and carry. If the future is above fair value, sell it, buy and store the spot, deliver at expiry. Profit locked at entry.
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