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What is the difference between a hedger and a speculator?​

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The key difference between a hedger and a speculator lies in their motivation and risk tolerance regarding price fluctuations.
Here's a breakdown:

Hedger
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• Motivation: To reduce or eliminate risk related to price movements of an asset they already own or anticipate owning/selling. They are primarily focused on protecting their existing position or future transaction.
• Risk Tolerance: Risk-averse. They are willing to forgo potential profits in exchange for price certainty and protection from losses.
• Example:
  • A farmer selling wheat futures to guarantee a price for their harvest, regardless of market fluctuations closer to harvest time.
  • An airline locking in jet fuel prices for the next year to protect their profit margins against rising fuel costs.
  • A manufacturer who needs to buy a specific metal in six months uses futures to lock in the price.
• Goal: Lock in a price or price range to protect profit margins and ensure stability. They are not trying to profit from price swings. They already have a business operation exposed to the underlying asset's price.

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Speculator
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• Motivation: To profit from price fluctuations of an asset. They have no underlying position or anticipated transaction related to the asset.
• Risk Tolerance: Risk-seeking or risk-neutral. They are willing to take on risk in the hopes of generating a profit.
• Example:
  • A trader buying oil futures because they believe the price of oil will rise in the future and they can sell the futures contract at a higher price.
  • Someone betting on the price of gold going down by short-selling gold futures.
• Goal: Profit from price movements. They are not trying to protect an existing position. Their sole focus is on making money by predicting the direction of the market.

In short

• Hedgers manage risk.
• Speculators take on risk.

Speculators are important for market liquidity, as they provide the counterparty for hedgers, allowing hedgers to effectively manage their risk. Without speculators, it would be much more difficult for hedgers to find someone willing to take the opposite side of their transactions.

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