Distinguish between insuring yourself and speculating

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Reference no: EM132124241

Question: I own a business that burns a million dollars a year of some fuel, and I cannot easily pass on increases in its price to my customers. Therefore, I trade futures and options to protect myself against increases. a. When I trade futures and options am I purchasing a form of insurance or am I just speculating? How would you distinguish between insuring yourself and speculating?

b. Might it be reasonable to say that I am insuring because my risks involve delivery of a real commodity, while a speculator is simply gambling?

c. If, say, I buy a call option to protect myself against a price increase, is the person who writes it a speculator or a seller of insurance? (A call gives me the right to purchase the commodity at a predetermined "strike" price.)

Reference no: EM132124241

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