Derivatives are (artificial) financial products that derive their value from another product (underlying). Such an underlying could be pretty much anything that can have a value, e.g. commodities, stocks, or currencies. Derivative contracts are traded for the future buying and selling of underlying. Derivatives can be binding for one person ((otc)option) or for both trading partners (in the case of […]
In its essence “hedging” refers to securing a portfolio against risks. To do so you invest in the derivatives market in products (eg. futures) that counteract the risks you want to avoid (e.g. interest risks or currency risks)
A trader speculates on market development (eg. price increase of a specific stock) by using derivatives (e.g. call futures on that stock). Usually, the trader doesn’t hold a (spot market) portfolio that needs to be hedged. He just buys/issues the respective derivates.