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.