| Definition |
Strategy used to reduce or eliminate financial risk by taking an offsetting position. |
Strategy aimed at profiting from price movements by taking on risk. |
| Purpose |
Risk management and protection against adverse price changes. |
Earning profits through prediction of market movements. |
| Risk Level |
Low to moderate; designed to minimize losses. |
High; involves betting on market direction. |
| Market Role |
Stabilizes the market and reduces volatility for participants. |
Adds liquidity to the market but may increase volatility. |
| Common Instruments |
Futures, options, forwards, swaps for risk protection. |
Futures, options, stocks, forex, and cryptocurrencies for profit. |
| Participants |
Corporations, farmers, exporters, importers, and investors managing risk. |
Traders, investors, and institutions aiming for financial gain. |
| Outcome Objective |
Avoid loss or reduce impact of unfavorable price movements. |
Maximize profit from favorable price fluctuations. |
| Position Type |
Offsetting position to existing exposure (e.g., buying and selling same asset class). |
New position based on expected future market movement. |
| Dependence |
Depends on actual exposure to risk. |
No exposure needed; positions created solely for profit. |
| Example |
An airline locks in fuel prices using futures to avoid rising costs. |
A trader buys oil futures hoping prices will rise and yield profit. |
| Regulatory View |
Generally encouraged for risk management. |
Heavily monitored to prevent market manipulation and excess risk-taking. |
| Impact of Price Movement |
Provides protection regardless of price direction. |
Profit or loss depends entirely on market direction. |
| Time Horizon |
Often longer-term or until risk exposure is resolved. |
Usually short-term and quick trades. |
Hedging vs Speculation