Derivatives can be used to either hedge or speculate. These actions:
A) increase risk in both cases.
B) decrease risk in both cases.
C) spread or minimize risk in both cases.
D) offset risk by hedging and increase risk by speculating.
E) offset risks by speculating and increase risk by hedging.

Question

Quizplus · Accepted Answer

Derivatives can be used to hedge against potential losses by taking a position that offsets the risks of an existing investment. This helps to reduce the overall risk of the portfolio. On the other hand, speculating with derivatives can be risky and can increase risk in the portfolio. Therefore, the use of derivatives can offset risk by hedging and increase risk by speculating. Choice D correctly reflects this concept.

Derivatives Can Be Used to Either Hedge or Speculate