Christopher Bond

Another roll of the dice: the elusive line between hedging and speculation

The question of whether a derivative transaction is properly characterised as a hedge or as speculation has long vexed the English courts. It has arisen recently in a decision of the Commercial Court dealing with the capacity of an Italian local authority to transact interest-rate swaps. This article reviews the caselaw on the question and asks: (i) is it possible for the courts to make any distinction between hedging transactions and speculative transactions?; and (ii) what test should be applied?