Can A Derivative Ever NOT Be A Hedge?

[Bill Murphy]

In my accounting class we just got to derivatives. There's the bit about how they have to be declared hedges from the start. However, we couldn't think of an example of a derivative not 'intrinsically' being a hedge.

The textbook said something about derivs being "sort of speculations" if they're not hedges, but of course did not provide any examples. Anybody got one? It'll be worth two extra credit points for me! /forums/images/icons/cool.gif

[adios]

You can buy and sell options as directional trades or bet on volatility one way or the other.

[paoneaj]

When you sell a call that is covered, (meaning you own the underlying stock) that is a hedge against downside movement on the stock (the position is protected from downside risk in the amount of premium received from the call option). However when you sell an UNcovered call (meaning you do NOT own the underlying stock), now this is speculative and you will win if the stock goes down (a maximum gain in the amount of premium received), however you will lose when the stock goes up. Keep in mind that this is VERY risky because of the unlimited loss potential. There is no limit to how high the stock can go and if you have to go into the market to satisify the option at a higher amount than the strike price, you will lose the difference.

[Ashe]

I gamble on options all the time. If I like a stock in the short run, I'll buy the option over the stock. Likewise with shorting, I’ll buy the put.

Also futures on stocks and commodities, which are derivatives often used by companies to hedge, can be traded for speculative proposes (like in the movie Trading Places).

Ashe /forums/images/icons/smirk.gif

[adios]

Actually you could speculate on interest rate swaps and interest rate caps as well. Furthermore you could probably take any side of a derivative transaction as a speculative move come to think of it.

[Bill Murphy]

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