According to Merton (1995), financial systems perform six functions.The function that employs the use of derivatives is:
A)the settlement function
B)the flow of funds function
C)the risk-transfer function
D)to resolve incentive problem
E)to promote the pooling of funds.

Question

Quizplus · Accepted Answer

The risk-transfer function employs the use of derivatives to transfer risk from one party to another. Derivatives serve as instruments for hedging against risks such as interest rate or currency fluctuations.

According to Merton (1995), Financial Systems Perform Six Functions