Chartered Financial Analyst Level 2

Explanation

This question describes an investor who provides insurance to hedgers in return for an expected profit. Let's analyze each option:

A. Arbitrageur - An arbitrageur seeks to profit from price discrepancies between related assets in different markets. They don't provide insurance services.

B. Liquidity provider - This is the correct answer. In commodity markets, liquidity providers (often speculators) take the opposite side of hedgers' positions, effectively providing insurance against price movements. Hedgers pay a risk premium (expected profit) to transfer their price risk to these providers.

C. Informed investor - An informed investor uses superior information to make investment decisions, but this doesn't specifically describe the insurance-providing role mentioned in the question.

Key Concept: In commodity markets, hedgers (like producers or consumers) transfer price risk to speculators (liquidity providers) who are willing to bear that risk in exchange for an expected profit. This risk transfer mechanism functions similarly to insurance, where the hedger pays a premium to protect against adverse price movements.