How Is Hedging Different from Speculation Using Derivatives? ⎊ Path

How Is Hedging Different from Speculation Using Derivatives?

Hedging is the use of derivatives to reduce or offset an existing risk exposure in the underlying asset, aiming for risk mitigation and price stability. A hedger uses the derivative to lock in a price.

Speculation, conversely, is the use of derivatives to bet on the future direction of an asset's price, aiming to profit from that price movement. A speculator takes on risk hoping for a gain, whereas a hedger transfers or reduces risk.

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Glossar

Speculation

Objective ⎊ Speculation involves taking positions in financial derivatives based on forecasts of future price changes, aiming to generate profits from short-term market volatility.

Hedging and Speculation

Hedging ⎊ Hedging is the strategic use of financial derivatives to mitigate or offset the risk of adverse price movements in an underlying asset or portfolio.