What is the difference between hedging and speculation using derivatives?
Derivatives
Hedging uses derivatives to reduce risk on an existing position; speculation uses derivatives to bet on price direction purely for profit, taking on new risk rather than offsetting it.
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A farmer locking in a crop price with a futures contract is hedging against price uncertainty, while a trader buying that same contract purely expecting prices to rise is speculating. Both use the identical instrument, but the intent and risk profile are opposite.
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