Chartered Financial Analyst Level 2

Explanation

An arbitrageur is a market participant who seeks to profit from price discrepancies between related assets or markets. In this case:

• Hedgers use derivatives to reduce or eliminate risk from their existing positions
• Index investors typically follow passive investment strategies tracking market indices
• Arbitrageurs specifically look for mispricings between spot prices (commodity) and futures prices to execute risk-free or low-risk trades

When there's a mispricing between the commodity's spot price and its futures price, arbitrageurs can simultaneously buy the undervalued asset and sell the overvalued one, locking in a risk-free profit. This activity helps maintain market efficiency by eliminating pricing discrepancies.