Question

. What is the difference between hedging and speculating?

. What is the difference between “margin” and “maintenance margin” on a futures contract?

Answer 1

Hedging tries to reduce the risk due the volatility of the prices of security or due to fluctuation of interest rate or exchange rate risk. Future contract, Forward contracts and Swaps help to reduce risk due to fluctuations of price . Hedging involves risk minimising or mitigation whereas
Speculating helps to gain profits from the fluctuations in price. It uses predicting of future price movements to gain profit. It is used by risk takers or risk lovers. There is a huge loss in case the prediction fails.

Margin is the portion of investment in share which has been done through loan .Investment in shares is one through own equity or the loan provided by brokers. The loan amount part is the margin portion.

Maintenance Margin is the amount of money which the investor should keep with the broker account . This helps to safe guard the interests of broker in case there is fall in price.