Financial innovation has revolutionized how we manage risk from "summary" of How Finance Works by Mihir Desai
Financial innovation has fundamentally transformed how we approach risk management. By creating new financial instruments and strategies, we are now able to hedge against a wider range of risks than ever before. For example, the development of options and futures contracts has allowed investors to protect themselves against fluctuations in asset prices. This has given individuals and businesses the ability to safeguard their wealth and investments in ways that were previously unimaginable. Moreover, financial innovation has enabled the securitization of assets, which has in turn facilitated the transfer of risk from one party to another. This has led to the creation of complex financial products such as collateralized debt obligations (CDOs) and credit default swaps (CDS), which allow investors to bet on the performance of underlying assets without actually owning them. While these instrum...
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