Derivatives can be used to either hedge or speculate.These strategies:
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 offset or hedge risks by taking an offsetting position in the market. This reduces or eliminates the risk of the underlying asset. On the other hand, derivatives can also be used for speculation, where traders take positions to profit from the changes in the price of the underlying asset. This increases the risk because the trader is exposed to the price fluctuations. Therefore, the correct choice is D, which states that derivatives can offset risks by hedging and increase risk by speculating.

Derivatives Can Be Used to Either Hedge or Speculate