Market Participants and Infrastructure

A forward hedge depends on more than its price formula. The contract must match the exposure, and the desk must know who manages settlement and default risk. This lesson separates execution from clearing, explains hedging, speculation and arbitrage, and traces the cash demands created by margin.

The architecture also plants the seed of every later pricing argument in this programme. Arbitrageurs trade executable inconsistencies between spot and forward claims. Under frictionless financing, no income and deterministic rates, replication gives $F_0=S_0e^{rT}$. Costs and constraints create price bands; they do not guarantee that every observed gap vanishes.

• distinguish exchange-traded and OTC execution, and separate execution from clearing;
• compute the payoff of a long or short forward given delivery price $K$ and realised spot $S_T$;
• classify a described trade as hedging, speculation or arbitrage from motive, not institution name;
• explain how a clearing house and margin system transform bilateral credit risk;
• quantify the leverage of a futures or long-option position relative to a cash position;
• describe how post-2008 regulation pushed standardised OTC contracts toward central clearing and reporting.

1. Two venues: exchange and OTC
2. The instrument landscape (first pass)
3. Who trades: institutions versus motives
4. Infrastructure layers
5. When roles blur