Question

which of the following are used for hedging and which are used for speculation? forward contracts, future contracts or hedging

Answer 1

Both the forward and future contracts are contracts that allow investors to buy or sell an asset at a pre-determined date for a pre-determined price. However, while the forward contracts are used for hedging future contracts are used for speculation.

This happens because forward contracts are settled on the end date of the contract. On the other hand, the value of future contracts is determined on a day-to-day basis until their expiration date. This is because, while the future contracts are traded on exchanges, forward contracts are private agreements between two parties. So, speculators use future contracts while those looking for hedging against risk go for forward contracts.