Difference between hedging and speculation

Difference between hedging and speculation

What is the basic difference between hedging and speculation?

If an investor takes a derivative position by holding the corresponding underlying, it is called hedging. The derivative position should be in the opposite direction of the underlying position, eg, if a person holds 100 shares of Infosys and if the investor buys a put option which is equivalent to obtaining the right to sell the shares at the stipulated strike price, then the derivative position is known as hedging. If an investor gets into a derivative contract without holding any corresponding underlying, then such a derivative position is known as speculation. It is also known as taking a naked position in derivatives.

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