Systemic risk could be avoided if all financial institutions would use derivative securities as a means of insuring against the default of the debt securities that they hold.

Question

Quizplus · Accepted Answer

Systemic risk refers to the risk of collapse of an entire financial system or entire market, due to the failure of a single entity or group of entities, which can lead to a cascading failure. Using derivative securities as insurance against default can help individual institutions manage their risk exposure, but it does not eliminate systemic risk. This is because derivatives themselves can be sources of market vulnerability, especially if they are widely used in a manner that creates interconnectedness or if the underlying risk assumptions are flawed.

Systemic Risk Could Be Avoided If All Financial Institutions Would