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NISM Certifications · NISM-Series-VIII: Equity Derivatives · Basics of Derivatives

A trader hedges a long portfolio, and a speculator takes an open position in the same futures contract. Which statement correctly distinguishes them?

A hedger uses futures to reduce an existing price risk in the underlying, whereas a speculator deliberately takes on price risk expecting to profit from price movements. Profit levels and holding period do not define the difference; the purpose of the position does.

  1. AThe hedger takes futures position to reduce an existing price risk, while the speculator takes risk hoping to profit from price movesCorrect
  2. BThe hedger always earns more profit than the speculator
  3. CThe speculator takes a position only in the cash market
  4. DThe hedger must always hold the position until expiry while the speculator cannot

Explanation

Hedgers use derivatives to offset exposure from an existing position in the underlying. Speculators take on risk with no underlying exposure, aiming to profit from price changes. The other options state things that are not true by definition.

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