In the futures market, hedgers and speculators differ in that:

In the futures market, hedgers and speculators differ in that:

• A. Hedgers are more at risk
• B. Hedgers have no risk
• C. Speculators are completely risk-free
• D. They face identical risks

Answer: (A)

Hedging aims to protect against price moves in a real business exposure, but it doesn’t erase risk completely. A hedger uses futures to lock in a price for the asset they own or must buy, transferring much of the potential downside to the futures market. Yet residual risk remains mainly from basis risk—the difference between the spot price of the asset and the futures price can change over time, so the hedge may not move exactly in parallel with the actual price the hedger cares about. There are also practical risks like margin calls, liquidity constraints, and timing differences (expiring contracts vs. when the cash market moves), all of which can leave the hedger exposed even after hedging. Speculators, by contrast, are taking on price risk on purpose to seek profit; they’re not aiming to offset an existing exposure. The other options—claiming no risk for hedgers, or that speculators are risk-free, or that both groups face identical risks—don’t fit because every party in futures has some risk, and hedging does not guarantee immunity from price movements.

Hedging aims to protect against price moves in a real business exposure, but it doesn’t erase risk completely. A hedger uses futures to lock in a price for the asset they own or must buy, transferring much of the potential downside to the futures market. Yet residual risk remains mainly from basis risk—the difference between the spot price of the asset and the futures price can change over time, so the hedge may not move exactly in parallel with the actual price the hedger cares about. There are also practical risks like margin calls, liquidity constraints, and timing differences (expiring contracts vs. when the cash market moves), all of which can leave the hedger exposed even after hedging.

Speculators, by contrast, are taking on price risk on purpose to seek profit; they’re not aiming to offset an existing exposure. The other options—claiming no risk for hedgers, or that speculators are risk-free, or that both groups face identical risks—don’t fit because every party in futures has some risk, and hedging does not guarantee immunity from price movements.