Difference Between Speculative and Hedge Accounts

J

jspittler

I am a new trader and have noticed that when setting up an account, I am asked whether it is to be a speculative or a hedge account. I have no trouble answering this question appropriately for my situation, but...

I am very curious what the differences are between accounts set up one way vs. the other. What all does this affect?

From what I can tell, this might affect margin, taxes, ???

I would like to have a better understanding of this subject.

Thanks,

Judd
 
Quote from jspittler:
.....a speculative or a hedge account.
More...
1) Hedge accounts must have assets and liabilities "invested" in the underlying commodity they claim to be hedging. Grain hedgers must have farmland, storage elevators, processing/milling facilities, rail cars, tanker trucks, barges and/or ocean freighters that demonstrate that they actually "deal" with a commodity.
2) You can't be a speculator and try to pass yourself off otherwise.
3) Hedgers can receive better margin treatment when they "hedge".
4) It demonstrates that the markets exist for commercial users first, speculative users second.
5) ?.......April-2007? It's about time that you posted something. :cool:
 
Quote from nazzdack:

4) It demonstrates that the markets exist for commercial users first, speculative users second.

..............................................................................................

BUT, in order for the producers etc to pass their business risk of price change to someone willing to accept that price risk you MUST HAVE speculators.

The problem of to much speculation is rather new because there is to much "HOT" money running around looking for something to play with. A good example has been in the wheat mkt where there are new instruments to play commodities as an asset class. The cash price relative to the futures price can get way out of line and the basis reflects excessive speculation. This gives REAL speculators a bad name.

The CFTC needs to continue working on spec limits to how many cars they can hold. The commodities mkts should not be toys to play with from asset classes that have ZERO interest in what hedging and risk transfer is all about.

PS: Another example that the average person can understand is the crude oil mkt that shot up to about 140 a barrel and dropped like a rock when the bogus specs quit finding a new fool to push it higher. Excessive speculation is not risk transfer, it is gambling with other peoples lives.

PSS: Like CNBC constantly pimping the stock mkt as a BUY.
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Quote from jspittler:

I am a new trader and have noticed that when setting up an account, I am asked whether it is to be a speculative or a hedge account. I have no trouble answering this question appropriately for my situation, but...

I am very curious what the differences are between accounts set up one way vs. the other. What all does this affect?

From what I can tell, this might affect margin, taxes, ???

I would like to have a better understanding of this subject.

Thanks,

Judd
More...

Speculative = 10:1 leverage
Hedge = 100:1 leverage.
 
Thanks for the replies so far. I am getting a better handle on some of the differences in how speculative and hedge positions are treated. The "FAS 133" suggestion was very useful.

nazzdack made a nice numbered list, so I may try to use that for some comments:

Quote from nazzdack:

1) Hedge accounts must have assets and liabilities "invested" in the underlying commodity they claim to be hedging. Grain hedgers must have farmland, storage elevators, processing/milling facilities, rail cars, tanker trucks, barges and/or ocean freighters that demonstrate that they actually "deal" with a commodity.
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No confusion here.

Quote from nazzdack:

2) You can't be a speculator and try to pass yourself off otherwise.
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Sounds reasonable. No arguments here.

Quote from nazzdack:

3) Hedgers can receive better margin treatment when they "hedge".
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I would like to get a bit more clarification here. Let me give an example to show where I am confused.

Lets look at speculative margin requirements for "Live Cattle". They list an initial margin of $1080 and a maintenance margin of $800. The initial vs. maintenance concept seems simple to me at first, but then as I think it through, it seems kind of strange.

My assumption would be that when I am first getting some contracts, the "initial" margin applies. So if I want ten contracts, I need to have at least $10,800 sitting in the account. Then the next day if the value of my contract goes down, I won't get a margin call unless the contract value has gone down by more than $2800 (which is ($1080-$800)*10). Assuming this is true, this part makes sense to me.

But now, instead of going down, lets say that the value of the contracts the next day is break even... no value change. Does this mean that my required margin is now the maintenance amount of $8000 total? If so, then it seems to mean that I have $2800 in my account beyond the required margin... does that then mean I can go and pick up another two contracts, for a total of 12 contracts?

If so, then it doesn't really make sense to me why having a higher initial vs. maintenance margin requirement is really doing anything other than making me wait a day to pick up the same number of contracts I could have otherwise bought in one day. (or which I could have bought in one day if I were hedging, since the initial hedging margin requirement is also $800 per contract.)

Anyway, if someone clarify this issue, it would be helpful.

Quote from nazzdack:

4) It demonstrates that the markets exist for commercial users first, speculative users second.
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Hmmm, well, OK.

Quote from nazzdack:

5) ?.......April-2007? It's about time that you posted something. :cool:
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Uh oh, the stealth paint is wearing off. :)


Thanks,

Judd
 
Quote from jspittler:
-----If so, then it doesn't really make sense to me......
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1) The initial margin level always applies to your account regardless of your unrealized profit or loss.
2) A margin call is triggered if your account shrinks down to the maintenance margin level where you could liquidate some or all of the position, satisfy the margin call and then bring yourself back up to the original initial margin level.
3) You could only pick up more contracts with additional money in your account. :cool:
 
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