Hedging:

Hedging is a mechanism by which the participants in the physical/cash markets can manage their price risk by taking long or short term position in the futures market.

Speculation:

Speculators are participants who are willing to take risks in the expectation of making profit. Any person, who feels that the market will move in one direction, can thus take a position in the market, with the intent of making profit.

Arbitrage:

Arbitrage is to cash in on price differential in two different markets. It is primarily done in two different ways. Firstly, sale & purchase is in two different exchanges usually low risk affair.

Similarly, purchase/ sale in the Spot (Physical) market and sale /purchase in the futures markets. The transaction involves taking and giving delivery of commodity. There is more risk in this model.

Margin Money:

The aim of margin money is to minimize the risk of default by either the seller or the buyer. The Exchanges fix rates of margin keeping in view need to balance security for contract and low cost of entering into contract. Ordinary margin is increased by exchanges in times of excessive volatility, usually termed as cash margin or special margins.