Derivatives can be used for hedging and risk management from "summary" of Institutional Investment Management by Frank J. Fabozzi
Derivatives play a crucial role in institutional investment management by allowing investors to hedge against various risks. Hedging refers to the practice of using financial instruments to offset potential losses that may arise from adverse movements in the market. By using derivatives, institutional investors can protect their portfolios from volatility and unforeseen events. One common way derivatives are used for hedging is through the use of options contracts. Options give investors the right, but not the obligation, to buy or sell an underlying asset at a predetermined price within a specific timeframe. By purchasing put options, investors can protect their portfolios from downside risk, as the option will increase in value if the underlying asset depreciates. Conversely, investors can use call options to hedge against upside risk by locking in a maximum purch...
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