How Does Hedging with Derivatives Differ from Speculation?

Hedging with derivatives is a strategy aimed at reducing or mitigating existing risks, much like buying insurance. Hedgers use derivatives to protect against potential losses from adverse price movements in an asset they already have exposure to.

In contrast, speculation involves using derivatives to bet on the future direction of an asset's price with the primary goal of making a profit. Speculators take on risk in pursuit of high returns, whereas hedgers seek to minimize it.