Who typically uses swaps for hedging and speculating?

Swaps are financial instruments that allow parties to exchange cash flows or risks associated with different financial variables. They are widely used in the financial markets for both hedging and speculative purposes. The correct choice identifies commercial banks, pension funds, and insurance companies as typical users of swaps.

Commercial banks often use swaps to manage interest rate risk or foreign exchange risk, allowing them to stabilize their income and improve their balance sheets. For example, a bank may engage in an interest rate swap to convert a floating-rate liability into a fixed-rate liability, protecting it from rising interest rates.

Pension funds utilize swaps to align their asset and liability durations, ensuring that the cash flows from their investments match the timing of their obligations to beneficiaries. This hedging strategy helps them manage longevity and investment risks associated with their portfolios.

Insurance companies also participate in swaps for similar reasons, particularly to manage risks associated with payouts or to optimize their investment strategies in different economic environments.

In contrast, government entities and hedge funds typically do not exclusively dominate the swap market. Government entities may use swaps, but they are not the primary users; hedge funds may engage in swaps primarily for speculative strategies, but they are a smaller segment of the broader spectrum of market participants compared to the institutional presence of banks,