Question

Elaborate on hedging and speculating

Answer 1

Hedging

Hedging aims at taking offsetting position to in an derivative to offset the gain or loss to the underlying asset.

The main focus is to eliminate the volatility associated with the value of an underlying asset by taking offsetting positions as compared to what the investor currently owns.

Hedging is less risky at it means to offset the gain or loss of underlying asset.

Speculating

Speculation is betting on the basis of expectation on the stock upside or downside movement. Speculators take risk and are vulnerable to the downside and upside of the market so speculation can be extremely risky.

Speculator tries to earn profit from the volatility of the stock.