I'd define speculation as the opposite of hedging. Hedgers try to minimize risk by (in effect) buying insurance. A farmer hedges by "locking in" the price of some of her cop in the spring because she doesn't know what the price will be in the fall.
A speculator, on the other hand, wants to take on risk to earn a high return. This can involve leveraging (buying assets using a lot of borrowed money), which increases the return (after interest). Another take on speculation comes from Minsky, who defines speculative finance as taking on debts to invest in projects or assets that cover only the interest payments on the debt, so that the speculator doesn't pay down the debt by paying any principal. This differs from hedge finance, in which income flows are expected to meet financial obligations (both interest and principal) in every period. It also differs from Ponzi or Madoff finance, in which income flows won’t even cover interest cost, so the firm must borrow more or sell off assets simply to service its debt. The hopes is that the value of the speculative assets purchased will rise enough to allow payment of interest and principal. In general, a speculator takes a big risk in hopes of making a big "killing." -- Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own way and let people talk.) -- Karl, paraphrasing Dante. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
