1. By:-
eFinanceManagement.com
https://efinancemanagement.com/derivatives/hedging-vs-speculation
Hedging vs Speculation

2. 1. Meaning
2. Differences
3. Example
4. Which is Better?
5. Reference
Content

3. Hedging:
Hedging is a strategy to minimize price risk in case of adverse movement. Or, we can say that it helps investors to reduce
or even eliminate the chances of loss because of a significant movement in the underlying asset’s price.
Speculation:
Speculation is basically buying and selling of assets with expectations of making a profit from the change in the price.
Thus, speculators/traders here enter into trading by identifying opportunities in the market to gain monetary benefit
from the fluctuations in the price of the underlying asset.
Meaning

4. 1. Objective:
In hedging, the objective is to reduce or do away with the risk. The sole objective of speculation is to earn a profit by
taking some amount of risk.
2. Involvement:
Hedging involves protection from the future movement in price. The speculation involves using price movements to
make a profit.
3. Operators:
Usually, a risk-averse investor goes for hedging. On the other hand, investors who love taking a risk to earn a profit, go
for speculation.
4. Risk Management:
Hedgers use hedging to manage their risk. On the other hand, speculators use techniques such as
stop-loss and limit orders.
Differences

5. 5. Volatility:
Speculators use price volatility to make a profit. Hedgers, on the other hand, try to protect themselves from price
volatility.
6. Profit Potential:
In hedging, there is no or very minimum profit potential while there is immense profit potential in speculation.
Differences

6. Example of Hedging:
Suppose a food-processing company, worried about the rise in wheat prices, contracts with a farmer for growing wheat to
purchase a futures contract. Now, if the wheat prices go up, the contract would allow the company to offset the higher
prices of wheat. And, if the prices go down or remain the same, the company won’t use the contract. The loss, in this
case, will only be the cost of the futures contract or the premium paid for that contract.
Example of Speculation:
Trader A believes the price of the company’s ABC stock would go up in some time. To benefit, the trader will buy the
shares of ABC now & sell them once the price moves up. The price movement, however, could be either way. The
current market price of ABC stock is $50. Now, if after one month, the price moves up to $70, investor A would gain
$20, but if the price drops to $30, the trader will lose $20.
Example

7. Hedging is a type of insurance. One doesn’t buy it to make a profit, rather as a protection from unforeseen losses.
Speculation may appear a sort of gambling, but in the long-term, it eventually helps to improve the markets.
Suppose if the market only includes farmers, agribusinesses, and consumers. In the absence of speculators, it becomes
easy for an organization to manipulate prices. But, speculators help to avoid such situations by betting on the price
movement on the basis of macro and micro factors. We can say that speculators, in a way, help with the price discovery.
Which is Better?

8. Reference
To know more about it, click on the link given below:
https://efinancemanagement.com/derivatives/hedging-vs-speculation