Notes on Hedging And Speculation:

  1. A Hedger is an Insured Party. But a Speculator is an Insurer
  2. Hedger has primary interest in the physical market. But Speculator has exclusive and sole interest in the future market
  3. Hedger operates in two markets simultaneously i.e. physical market for merchandising and future market for hedging. But Speculator operates in one market either as a bull (long time buyer) or as a bear (short seller)
  4. Hedging is intended to protect against adverse price change. But speculation is intended towards capital gain
  5. Hedging do not have frequent "in" and "out" activity of hedger in the future market. But speculation is characterized by frequent "in" and "out" activity in future market.
  6. Hedging presupposes large number of speculators. It literally impossible without speculation. But speculation is a independent activity.
Speculation Vs Hedging/Is Hedging Dependent On Speculation

           Hedging and Speculation are interrelated function and speculation is entirely dependent on hedging. This is because of the reason that in the future market selling hedger cannot always find buying hedger and if the number of selling hedger is larger than the buying hedger, it would create a unbalanced condition on the future market. Therefore it is essential to have another group of traders who are willing to buy or sell. This group is termed as "Speculator" who seek to gain capital profit by correctly anticipating the probable price trend or price fluctuations in the near future.

Functions Of Speculator:

           Speculative trader is necessary for any broad, continuous and stable commodity market. The following are some of the prime functions of speculators:

  1. Primarily the speculator act as an insurer by taking the other end of hedging and enable hedgers to place their hedges at ease and without costly delays.
  2. The speculator anticipates the future market price and on the basis of this price, the speculator purchase or sell commodity to seek capital gain. If the speculator expects the price to rise, he may buy to sell in the near future and if he expects the price to fall in the near future, he may sell the commodity to avoid future losses.