Derivatives such as futures and options enable risk management from "summary" of Financial Markets and Institutions, Global Edition by Frederic S. Mishkin,Stanley G. Eakins
Derivatives, such as futures and options, play a critical role in enabling risk management in financial markets. These financial instruments allow investors to hedge against potential losses by locking in prices for future transactions. For example, a farmer can use futures contracts to protect against a drop in the price of crops, while a company can utilize options to safeguard against fluctuations in interest rates. By using derivatives, investors can reduce their exposure to various risks, such as price volatility, interest rate changes, or currency fluctuations. This risk management strategy helps to stabilize cash flows and protect investments from unexpected market movements. In essence, derivatives provide a way for market participants to mitigate uncertainty and ensure a more predictable financial outcome. Moreover, derivatives offer flexibility and customization in ma...
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