Markets · 6 pages · 12 min

Why hedging and speculating can use the same contract

The same futures contract can offset an existing risk for one book and add a new risk for another.

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From the opening

Hedging and speculating are different motives that can print the same futures or options contract. A hedge offsets a risk already sitting in a crop, a fuel bill, or an inventory, while a speculation takes on a risk the book did not already have. The opening covers one contract, two motives, a hedge shrinks an existing risk, and a speculation adds a new risk.

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Inside

One contract, two motives
A hedge shrinks an existing risk
A speculation adds a new risk
The tape does not label motive
Where the idea stops applying
A distinction worth keeping

Sources

Hedging versus speculation in futures
Hedge accounting documentation

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Why hedging and speculating can use the same contract

From the opening

Inside

Sources

Also on the desk