2006-09-19 12:08:10 · 4 answers · asked by Brenda M 1 in Business & Finance ➔ Investing
If you are talking about futures and options markets, a hedger is typically an actual user of the commodity that is being traded, while a speculator is just seeking to make money on the price fluctuations of the commodity. So, if you are talking about corn, a farmer may want to sell his corn at a guaranteed price in three months, when he expects to harvest and sell his crop. He sells a futures contract (or an option) for a certain quantity of corn for a certain price per bushel. He is willing to accept that price even of the price of corn goes through the roof between now and the time his contract calls for delivery of the corn. He is hedging against a downturn in the corn market by giving up his rights to profit from an increase in price in corn.
By contrast, the speculator has no interest in the corn itself, just in the price of corn in the future. He will "buy" the corn (or the rights to the corn), never intending to take delivery on the corn, and essentially "bet" that the price of corn will go up between the date of the purchase and the projected delivery date. He can then sell the corn contract before the delivery date at the market price, which (if he has made an astute investment) will be higher than the price he paid for the corn.
Of course, if the price of corn goes down, the speculator takes a loss. The hedger gets his price anyway, because he is immune from price fluctuations once he has sold his futures contract to the corn.
Speculators perform a valuable function in the commodities marketplace: they provide liquidity to the markets. That is, there are so many buyers and sellers in the market that buyers can find willing sellers and sellers can buy willing buyers almost instantly.
2006-09-19 12:28:46 · answer #1 · answered by Martin L 5 · 1⤊ 0⤋
Difference Between Hedger And Speculator
2017-01-11 08:59:01 · answer #2 · answered by Anonymous · 0⤊ 0⤋
I suggest both answers above are true. Hedging comes from "hedge" (a fence, but then made out of bushes). This actually means you're protecting the trade. This can be done by contracts with a fixed future price, as described by Martin L.
But speculators can hedge too. It can be that someone has a "long" (a buy) position in an uncertain market. He could strategically place a short position (a sale) too, to be able to defend himself against losses if the initial trade goes against him, and sell the position that goes wrong asap, or maybe wait (and hopefully make some extra money later on) till the tide turns.
2006-09-20 05:32:57 · answer #3 · answered by Caveman 4 · 1⤊ 0⤋
The hedger has another position, possible on the underlying or in another derivative, going against the position he is taking.
The speculator only is speculating in the movement of the underlying.
2006-09-19 13:05:12 · answer #4 · answered by Anonymous · 1⤊ 1⤋