Derivatives are financial instruments that:
A)Present high levels of risk and should only be used by the wealthy.
B)When used correctly can actually lower risk.
C)Should only be used by people seeking high returns from low risk.
D)Represents the outright purchase of a bond.

Question

Quizplus · Accepted Answer

Derivatives, when used correctly, can actually lower risk by allowing investors to hedge against potential losses. However, if used improperly or in excess, they can present high levels of risk. Choice A is incorrect as derivatives should not be limited to only the wealthy, but instead should be used prudently by any investor. Choice C is incorrect as derivatives are not low risk investments and should only be used by individuals who understand their risks. Choice D is incorrect as derivatives do not represent the outright purchase of a bond, but rather are contracts based on the value of underlying assets such as bonds, stocks, or commodities.

Derivatives Are Financial Instruments That