Question
In: Finance
what is the difference between a speculative stragety and hedging strategy?
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Expert Solution
Answer-
Spculative strategy is a strategy which involves gains from the changes in the price of the security between future price and spot price.
Speculative strategy involves seurities and other trading of instruments such as bonds, commodities, currencies, and derivatives.
Hedging involves a strategy which invilves an act of preventing an investment in a financial instrument against unforeseen price changes. It reduces the risk of price changes of the underlying insrtrument. Hedging involves financial instruments mainly currencies and commodities.
Speculation relies on the risk factor, in anticipation of getting returns whereas Hedging ia a way or means to control price risk.
Speculation involves incurring risk to make profits from changes in price of a financial instrument whereas Hedging involves protection against changes in price on financial instrument.
The induviduals operating in Speculation are risk lovers whereas in Hedging the individuals operating are risk averse.
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